Don’t look now, but the Securities and Exchange Commission just expanded your scope of worry for internal performance metrics.
Yesterday the SEC fined Credit Suisse $90 million for employees’ improper manipulation of two performance metrics. Was the misconduct on the same scale as what we saw at Wells Fargo? No, mostly because the victims here were a small number of rich people rather than a large number of consumers, and the manipulation happened in one specific Credit Suisse division for a short period of time.
Still, an enforcement action of $90 million is no joke, and this particular case shows how the SEC can pursue improper use of performance metrics, too. It has Wells Fargonian overtones, but where Wells Fargo had a rotten culture that led to harm foisted on consumers, Credit Suisse more shows how poor oversight can prompt the SEC to hammer you for harm to investors—and most companies interact with investors far more than they do with consumers. So let’s take a look.
According to the SEC’s complaint, employees at Credit Suisse manipulated one metric, Assets Under Management, which helped them hit performance targets set by management. That manipulation of AUM then distorted the accuracy of another benchmark, net new assets. NNA is what outside investors use to judge how well a financial firm does at attracting new business.
Right there, compliance officers should pause and contemplate the pressures that led to this specific misconduct. As SEC Enforcement Director Andrew Ceresney said in a statement: “Credit Suisse conveyed to the investing community that it followed a structured process for recognizing net new assets when, in fact, the process was reverse-engineered to meet targets.”
That’s a powerful reminder of how important your culture and control environment are. When a company is serious about good conduct, it focuses on building strong, ethical business processes—and then do your best to win business, but let the results speak for themselves. The culture at Credit Suisse worked backwards: it started with high demands on employees to meet performance goals, who then reverse-engineered their way around internal controls to justify the manipulated performance metrics.
So one question for compliance officers: If your corporate culture were rotten and emphasized performance over ethical conduct, how would your employees respond? How would they reverse-engineer their way around your controls and policies? That’s a thought experiment to conduct in your free time.
Credit Suisse Details
The misconduct at Credit Suisse unfolded from late 2011 through 2012, and involved at least four clients who had parked assets at the bank. (We don’t know who these clients were. Two are described as “ultra-high net worth,” so that rules out me.) Those client assets could be assets under custody, where Credit Suisse simply held the assets and provided no other services; or assets under management, where the bank provides more active management of the assets, ostensibly to make them grow.
What did Credit Suisse employees do? They concocted various reasons to reclassify those assets under custody to be assets under management, when those reasons really didn’t pass the smell test. More assets under management (AUM) would increase the bank’s net new assets (NNA). Higher NNA shows investors that your financial firm can bring in more new business and charge more management fees.
As usual for enforcement these days, the devil was in the emails. For example, in early 2012, Credit Suisse employees were trying to reclassify the assets of “Client B” into AUM. (The assets in question were shares in a company that had just been acquired, and Client B was reviewing his investment options.) One banker in charge of reviewing that change said no, the situation didn’t merit classifying Client B’s assets as AUM. Another at Credit Suisse promptly replied, “Any option to speed this up? We need this inflow in March!” to meet quarterly expectations on NNA goals.
A worse example came from “Client C.” A senior manager at Credit Suisse was looking for ways to declare more NNA, and asked whether any of Client C’s assets could be reclassified as AUM. The opinion in the private banking division had been no. The senior manager then emailed the account executive who handled Client C, and told that person: “We need to do something pretty big. Need your flexibility and will ensure compensation of potential negative future impacts.”
To be clear: if a client’s assets are reclassified as AUM, the banker who works with that client gets more compensation—and likewise, if those assets are later pulled out of AUM, the banker loses that compensation. So the senior manager essentially was telling Client C’s banker to just do it already, and we won’t nick you later if we yank the assets back out of AUM. Suddenly one of Client C’s accounts qualified as AUM that could boost net new assets.
The SEC’s complaint has plenty of examples like that. Compliance officers will wince reading it.
The Lessons to Learn
Above all, this case shows that the SEC is serious about performance metrics and how they might be abused. Where the Consumer Financial Protection Bureau whacked Wells Fargo for harm to consumers, the SEC whacked Credit Suisse for harm to investors—but fundamentally, both banks committed the same sin. Both created a culture where meeting performance metrics was so important, employees felt compelled to lie and cover up false actions.
The other usual lessons are also present: Credit Suisse won praise from the SEC for cooperating and conducting a thorough investigation, and changing some policies to prevent future abuses. Notably, Credit Suisse also re-assigned the decision-making authority for AUM and NNA away from business units and to the group finance function. Still, the bank also had to admit wrongdoing as part of its settlement, and the (now former) chief operating officer of Credit Suisse’s private banking division paid $80,000 in personal fines, too.
Mostly, however, compliance officers need to keep thinking about when demands for high performance lead to a culture of lying to keep your job and your paycheck. Because it happens a lot, and now regulators are thinking about it too.