SEC spots ethics lapses

Incomplete codes of ethics and codes of ethics that aren't followed were cited as two common problems found by Securities and Exchange Commission examiners at investment advisory firms. The SEC's office of compliance inspections and examinations recently issued its 2008 ComplianceAlert letter that lists common deficiencies found at investment advisory firms, brokerages, mutual funds and transfer agents. "At many of the advisory firms that appeared to have effective compliance programs" in the area of internal compliance controls, "compliance personnel were actively involved in implementing those programs," according to the report. In the area of "soft dollar" use, 20% of the commissions earned by advisers who used soft dollars were directed to broker-dealers through which they earned soft-dollar credits. Commissions on transactions that earned soft-dollar credits averaged 5 cents a share, according to the report. Most advisers document their efforts to seek best execution as required, the report said. Weak oversight of proxy service providers and proxy votes that were inconsistent with the fund's voting policies were common deficiencies found for mutual funds, the report said. The report included the results of recent exams of select large broker-dealers assessing their valuation and collateral management practices related to subprime-mortgage products. Among the issues highlighted in the report were price verification deficiencies at some firms and insufficient staffing for valuing securities prices. Unsuitable recommendations and inadequate supervision were cited as common problems found at broker-dealers affiliated with insurance companies.