ADDRESS OF THE SEC'S DIRECTOR OF THE OFFICE OF COMPLIANCE INSPECTIONS AND EXAMINATIONS

December 20, 1995 TO: COMPLIANCE COMMITTEE No. 46-95 INVESTMENT ADVISERS COMMITTEE No. 49-95 SEC RULES COMMITTEE No. 130-95 RE: ADDRESS OF THE SEC'S DIRECTOR OF THE OFFICE OF COMPLIANCE INSPECTIONS AND EXAMINATIONS ______________________________________________________________________________ Lori Richards, Director of the Securities and Exchange CommissionGs Office of Compliance Inspections and Examinations (“OCIE”), recently addressed the InstituteGs Securities Law Procedures Conference on a variety of issues concerning mutual fund and investment adviser compliance and examinations. A copy of Ms. RichardsG address is attached. Ms. Richards announced the formation of the “Mutual Funds Industry Examination Panel,” which will review the OCIEGs new, not yet implemented examination manual, subject it to independent field tests, and propose improvements. The members of the panel are Henry Hopkins (T. Rowe Price), Peter Ambrosini (Price Waterhouse), Paul Haaga (Capital Group), Tom Lemke (Strong Group), Mary Ann Tynan (Wellington Management), Phil Kirstein (Merrill Lynch Asset Management), Susan Cote (Prudential Advisers), Mark Baltuch (Zweig Advisers), Joe Carrier (Coopers & Lybrand) and Dan MacLean (Dreyfus). Ms. Richards announced that the examination manual will be finalized in early 1996. Ms. Richards also announced several actions taken to improve the efficiency of the operations of the OCIE, including an increase in staff training, the creation of more cross-disciplinary examination teams, working to ensure consistency in the approach and disposition of examinations, and working for improved coordination within the regulatory community. Ms. Richards also announced that the OCIE has begun coordinating examinations of smaller, local investment advisers with state regulators by conducting joint sweep examinations of these advisers and financial planners. The OCIE is working to improve coordination with the regulated community as well. Ms. Richards stated that the OCIEGs examinations should recognize the “high degree of professionalism and institutional support” in fund compliance departments. She also stated that the OCIEGs examinations should recognize state-of-the-art compliance systems by not spending too much time reviewing routine operations. She said, “We are fortunate that your community has a long tradition of honesty . . . We want to encourage and support your efforts to maintain those high standards.” Ms. Richards stated that there are a few areas in which examiners found problems. First, commission and mark-up dollars belong to the client and should not pay for the adviserGs operating expenses or client referrals, absent disclosure to clients. She noted that the OCIE “frowns upon” double or triple billing of operating expenses to soft-dollar brokers. Second, access persons should be required to file quarterly reports required by Rule 17j-1 on time and their trades should be reviewed in light of client and fund trades. A fundGs board should inquire into the differences between the adviserGs code of ethics and that of the fund. The board should know whom the adviser deems to be covered by each code. Finally, the OCIE has seen some problems with respect to pricing override procedures. Advertised performance should not drop suddenly late in the year when expenses turn out to be much higher than estimated and pricing mistakes should be corrected. Thomas M. Selman Associate Counsel Attachment