The Monsters of Compliance – Freddy Krueger

freddy kruger and compliance

The pumpkins and garish Halloween decorations are out on my front lawn. With the Halloween season upon us, my mind has become stuck on movie monsters and been mixed with compliance. This is the terrible result.

Freddy Krueger terrorizes the kids of Springwood, Ohio, attacking them when they sleep. He seeks revenge for the dark actions of their parents long ago. The first it the series, A Nightmare on Elm Street, terrified me. I had to watch it in the middle of the day so I could shake off the fear before falling asleep. (I found the rest of the series less scary.)

For fund managers and investment advisers, falling asleep and missing the problems can get you in trouble. The SEC announced sanctions against three firms for falling asleep when it comes to the custody rule.

For one firm, it was victimized by a hack of its client’s email account, but it’s internal procedures were inadequate to stop the fraud. The firm received an email purportedly from one of its clients asking to wire $290,000 to a foreign bank account. The firm complied. Unfortunately, someone had hacked into the client’s email, falsified the wire request and directed it into its criminal hands.

The weakness was that the firm did not obtain its clients’ authorizations before transferring funds to third party accounts.The SEC order also has a strange tale of pre-signed letters of authorization and copying clients’ signatures to transfer funds.

The firm also failed to conduct surprise audits for the accounts as required by the rule. Those were violations of the rule, but did not lead to the problem nor could the audits have prevented the problem.

The firm fell asleep and Freddy launched his nightmare at the firm for their past failures.