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April 2021

Lessons from Bernie: A Culture of Compliance and Why It Matters

Written by
W. Gregory Richardson, CFA

President, Principal, Portfolio Manager

As an SEC-Registered Investment Advisor (RIA) held to a fiduciary standard, Mitchell Sinkler & Starr has always had a strong compliance program. The role of compliance changed significantly, however, in 2008. That was the year that Bernie Madoff became a household name. Responsible for the largest Ponzi scheme in history, Madoff bilked investors out of at least $20 billion over decades and was sentenced to 150 years in jail in 2009.

Despite multiple warnings, the SEC failed to catch Madoff until it was too late. We should note that their resources are limited. In 2020, the SEC conducted roughly 3,000 RIA exams. While this may seem like a large number, it was only 15% of the total number of registered advisors. As a 50-year-old firm, Mitchell Sinkler & Starr has undergone two comprehensive SEC exams in the past 20 years that resulted in requests to improve a few areas of our compliance program, which is the point of these exams. But some firms have never been examined. And when the SEC knocks on your door (actually, they send a letter), it is too late to establish a compliance program—it had better be up and running already. Common sense, right? The SEC even provides a study guide by announcing their focus for the calendar year. For 2021, this includes:

  • Protecting retail investors and seniors, with a focus on areas such as fiduciary standards, fees, and sales practices,
  • Compliance programs for RIAs that have never been examined, and
  • Information security and operational resiliency, including business continuity and disaster recovery plans (a little late, in our opinion).

Mitchell Sinkler & Starr believes that compliance is the responsibility of every employee at the Firm, and our culture of compliance is spearheaded by our Chief Compliance Officer and overseen by our Compliance Committee, which is made up of five of our nine full-time employees. Our clients may not realize it, because they do not interact with our compliance program in a direct manner, but on any given day, we

  • Follow well established procedures and controls when opening, closing or transferring accounts,
  • Verify the authenticity of any client request to disburse funds from an account,
  • Follow our best execution guidelines when placing client trades,
  • Protect our clients’ PII – Personally Identifiable Information,
  • Educate our staff regarding cyber security risks,
  • Maintain state-of-the-art firewalls, antivirus software, and back-up procedures as part of a comprehensive information technology program designed to protect the Firm from cyberattacks, such as ransomware, and
  • Review, evaluate, update, and file, in a timely manner, all required SEC forms and disclosures.

In addition to being prepared for the next SEC exam, Mitchell Sinkler & Starr annually engages our auditor to conduct a Surprise Exam, which is designed to verify, track, and trace cash deposits and distributions from a sample of client accounts. This program seeks to protect all the Firm’s accounts by statistically sampling transactions, much like the audit of year-end financial statements for any ongoing business. This required program is the direct result of the Madoff fraud, as his Ponzi scheme relied upon fictitious account statements that reflected the transfer of assets from client to client with no basis in reality. In Madoff’s world, a gain in one account was simply the temporary transfer of cash from another client’s account.

Our clients should feel confident that the combination of our fiduciary duty and our compliance program ensures that their assets and personal information are safe, and that each and every interaction and transaction we engage in on their behalf was done with utmost attention to their financial security and well-being at all times.

To the extent that you are responsible for keeping us even more vigilant than we were before, thank you, Bernie.