This post was written by Maria Wall.
On 22 November 2011, the Financial Services Authority (“FSA”) publicised that it had fined Dr. Sandradee Joseph £14,000 and banned her from performing any significant influence function in regulated financial services for breaching Principle 6 of the FSA’s Statements of Principle for Approved Persons.
Principle 6 states:
“An approved person performing a significant influence function must exercise due skill, care and diligence in managing the business of the firm for which he is responsible in his controlled function.”
Who is she?
Dr. Joseph is a former Compliance Officer at Dynamic Decisions Capital Management (“DDCM”), a hedge fund management company based in London and Milan.
Why was she penalised?
After the collapse of Lehman Brothers, the investment strategy adopted by DDCM for the fund it managed resulted in losses totalling approximately 85% of the fund’s total assets under management. To conceal the losses, in late 2008, a senior employee at DDCM entered into a number of contracts, on behalf of investment funds managed by DDCM, for the purchase and resale of a bond. Concerns about the legitimacy of the bond were raised by investors and DDCM’s Prime Broker resigned as a result of its concerns. It was reported that Dr. Joseph failed to consider the reasons for the Prime Broker resigning and despite being aware of the investors´ concerns about the bond, failed to properly investigate those concerns or act upon the information. It was reported that she believed that external lawyers had been instructed on the transactions and would have acted on any concerns as appropriate.
What was the outcome?
Dr. Joseph agreed to settle during the course of the FSA investigation and therefore qualified for a 30% reduction on her financial penalty. Were it not for this discount, the FSA would have imposed a financial penalty of £20,000 on Dr. Joseph. In addition the FSA issued a partial prohibition order preventing Dr. Joseph from performing any significant influence controlled function in relation to any regulated activities carried on by any authorised or exempt persons, or exempt professional firm on the grounds that it considered her not to be a fit and proper person.
Why is this important?
The FSA stated that Dr. Joseph took “too narrow” a view of her role as Compliance Officer. This is clearly meant to send a message to those in a similar role in the investment funds industry, as well as the wider regulated market, that those persons working in compliance functions need to take ownership of internal regulation and the monitoring of internal controls of the institutions they work in. It also warns those in compliance about misplacing responsibility onto outside legal counsel.
A spokesperson for the FSA commented that “[the FSA] is committed to driving up standards across the industry and will take robust action against those who do not meet our standards.” This highlights the FSA’s desire to maintain, or at least to be seen to be maintaining, market confidence in a fair and accountable system: one of its four objectives under the Financial Services and Markets Act 2000. In the last year, the FSA has been vocal in its regulatory activities and recent reports of fining in the industry have been well publicised. This again may be designed to inspire confidence in the FSA’s ability to monitor industry movement. Conversely, it can be noted that Dr. Joseph left DDCM in March 2009 and it has taken over two years for her final penalty to be given.
It could be argued that by allowing for Dr. Joseph to receive a discount on her fine (originally placed at £20,000), the FSA is showing that collaboration during its investigative procedures will result in direct quantifiable benefit thereby encouraging a more efficient means of market regulation in practice.
Moving forward, it would be prudent for hedge fund managers – and particularly those in compliance roles – to ensure that they and the rest of their compliance teams are aware of, and vigilant in overseeing, material internal matters of the funds they have been hired to manage and that adequate internal checks and measures are in place.