Editor column

Citation

Davis, H.A. (2005), "Editor column", Journal of Investment Compliance, Vol. 6 No. 3. https://doi.org/10.1108/joic.2005.31306caa.001

Editor column

We start this issue with an important and authoritative white paper written by a committee of the Compliance & Legal Division of the Securities Industry Association covering the functions and interactions of the compliance function in an investment company - an important reference and a must read. Patrick Robbins and Alicia Huffman follow with the fascinating story of how Arthur Andersen was convicted for obstruction of justice based on how it implemented its document retention/destruction policy during the Enron meltdown, why the Supreme Court reversed that conviction 9-0, and how Sarbanes-Oxley created an entirely new and much stricter criminal obstruction provision that renders the Supreme Court’s opinion in Andersen virtually irrelevant. The authors explain why, in light of the new provision, compliance managers must err on the side of caution in determining how to enforce – and when to suspend – a document retention/destruction policy. Amy Kroll and Anders Franzon point to lax branch office supervision in failing to detect fraud in the past. They cite the Gruttadauria case as a well known example, and counsel broker-dealers to think systematically about how they supervise their branches and other remote locations, both to protect investors and to ensure compliance with SEC and SRO requirements. Nick Robinson then provides some thoughts on IT governance – vitally important and completely intertwined with compliance given the pervasive role of IT in transactions, record-keeping, and security. Then as part of our regular UK coverage Aman Jairath provides an overview of the Market in Financial Instruments Directive (MiFID) and Ruth Evans explains Financial Services Authority (FSA) guidelines on outsourcing. Because MiFID will cover the entire European Union when it becomes effective in November 2007, the FSA will be conforming its regulations accordingly – and the deadline is not far off. We conclude with two articles that look back at the investment research investigations and settlements in 2002. While reviewing some of the principal issues related to conflicts of interest and fraudulent recommendations, Alex Proimos provides a case study from Australia that’s just as troubling as the well known incidents in the United States. Finally, Chee Ng summarizes his study of how the announcement of fraud investigations related to investment research and the final settlement in 2002 affected the share prices of the ten investment banking firms involved. He makes it clear that clashes with the New York Attorney General do not build shareholder value. Patrick Robbins of Shearman & Sterling accentuates this point, noting a recent federal court decision that a corporation’s criminal conduct is “inherently material” to investors, even if it had a de minimus impact on the company’s financial statements. Galati v. Commerce Bancorp, Inc., No. 04-3252, 2005 U.S. Dist. LEXIS 26851 (D.N.J. Nov. 7, 2005) (unpublished). In Galati, the court indicated that if any of a company’s pre-existing statement to the market are rendered false misleading by the existence of the illegal conduct, the company may violate the SEC’s anti-fraud provision, Rule 10 b-5, if it does not disclose the conduct. We’ll be back to help you build shareholder value with improved compliance systems next quarter. Remember, our expert readers are also the contributors of our fine articles.

Henry A. DavisEditor

James A. Tricarico JrConsulting Editor