Transparency Theory

Morneau Shepell’s Mark Bhattacharya discusses why he believes compliance can prevent another Bernie Madoff scandal

Morneau Shepell was in need of some experience. The firm, which is the largest of its kind in Canada, provides human resource consulting and outsourcing services such as pension administration, pension investment consulting, workplace safety, and employee assistance programs.

In order to enhance the compliance and operations departments for its newly formed asset management division, the company wanted to find someone with experience in multiple areas: finance, asset management, and compliance.

It found that experience in Mark Bhattacharya. Originally a chartered accountant with training from PricewaterhouseCoopers, Bhattacharya spent a few years working with the regulatory body of the Cayman Islands’ government. He later returned to Canada, working for the Ontario Securities Commission, UBS, and a large asset management firm before joining Morneau Shepell as its chief compliance officer and head of operations.

Advantage caught up with Bhattacharya to discuss the shifting and growing role of  compliance.

What brought you back to Canada?

I realized while I was in the Caymans that I found my identity in Toronto—I was born and raised in Toronto.
I ended up getting a job right away with the local securities regulator, which is the Ontario Securities Commission (OSC). 

What type of work did that entail?

I did some really interesting work for the OSC. One of the projects I worked on was a large investigation involving market timing and late trading in the mutual fund industry. This was back in the early part of 2003, 2004. The team I was working with was the most well-equipped to really start an analysis on the industry to see if there was any monkey business going on with market timing and late trading in the Canadian mutual fund market.

How did your team handle such a major project?

We took this big case and brought it down to an investigation level. We were able to analyze the marketplace, filter suspicious trading patterns, and figure out how to deal with the problem.

Ultimately, it led to an enforcement action, and that led to a settlement with four really huge mutual fund companies here in Canada. The settlement was for $156 million, which at the time—and still to this day—was the largest settlement in securities history in Canada.

That really set the tone for the whole mutual fund industry.

While keeping your experiences in mind, what would you say are some of the guiding principles in your role as chief compliance officer?

I want to make sure that the decisions made on behalf of the business ensure that clients are always paramount, and that the interests of those clients prevail over anything else. If you treat your clients fairly and make sure their interests are taken care of first, then you’re going to have more clients.

However, sometimes people get too prescriptive with the rules. There have to be written rules, but, ultimately, if you’re dealing fairly with your clients, you’re going to be dealing with them in a compliant manner, and you’re also going to have a successful business.

How does this outlook on compliance compare to what you’ve seen in the industry?

In the past, members of compliance—especially with some investment jobs—didn’t necessarily inhabit front-office roles, because compliance was more of an afterthought. It changed a lot because of the reputation risks in the industry in terms of what’s happened, which was anything from a Bernie Madoff situation, to a less extreme situation like a Sino-Forest Corporation.

Asset management is based purely on reputation. The minute you soil your reputation, you don’t have any business.

“Asset management is based purely on reputation. The minute you soil your reputation, you don’t have any business.”

What would you say compliance means to you?

Despite its challenges, compliance is paramount in asset management. Compliance doesn’t necessarily mean—to me at least—all the securities rules and a compliance officer sitting at the door. Compliance to me is more about the actual culture, spirit, and everything involved with business decisions and dealings with clients. You need to make sure you’re treating clients fairly. This, to me, is what compliance is all about.

To switch gears a little bit, why is transparency such a big topic in the world of compliance now?

In the past, clients had a difficult time knowing what services they were paying for and what their returns were; whether it’s attribution in the returns or the attributions for the fees that they pay.

I really believe in transparency because I’ve seen—and this may be true more so in the retail space than the institutional space—a lot of investors who don’t really realize how much they’re paying in fees and how that affects performance. There’s a lot of manipulation around that kind of thing. That’s why the industry and regulators are really trying to flesh it out.

Would you say the move toward transparency is working then?

The industry of asset management is really split between retail and institutional. In the institutional space, the notion is that you’re dealing with sophisticated investors. A sophisticated investor is using a consultant who is fleshing these things out. I’m seeing that for sure. That’s been a bit more longstanding. But I think these trends in transparency and these improvements have benefited the retail space lately.

What has been interesting about your work at Morneau Shepell?

It’s been really exciting to help run a business and really put my stamp on it. I enjoy being at the table, whether it’s for client prospecting, onboarding clients, or servicing clients—all aspects of dealing with clients involve compliance. The department is involved in every single aspect of the business.

It’s really a field that has grown a lot and will continue to grow. It’s a good career path for a dynamic, detail-oriented person. I’ve seen more and more professionals moving toward compliance roles, whether they’re lawyers or accountants.

What can others in the industry learn from these changes?

You don’t have to sit in the back anymore, basically. You’re involved in all decisions. And you should be involved in all decisions, because otherwise you’re going to run the risk of not doing the best for your clients.