This memorandum is prepared to assist Johan and Rebecca in designing a compliance program which will incorporate both ERISA and SEC.
In implementing a good compliance program, several dilemmas are raised. They include; difference in the portfolios, profitability, risk elements and transparency for both businesses. Section two attempts to provide solutions for the issues raised at the previous section. Lastly, strategies to make the implications work are discussed at the last section.
A compliance program is a system or process which shows a business’ policies and procedures which assist it not to violate general laws and regulations .Johan had initially made a compliance form regarding Employee Retirement Income Security Act (ERISA). However, he is required to add more compliance which accommodates Security Exchange Commission (SEC). Some issues and dilemmas will occur. First of all, they offer different portfolios. ERISA aims at helping employees when they retire by giving them some income. SEC helps people to participate in the buying and selling of financial securities such as bonds, shares, and treasury bills .They can be short and medium term, and the investors won’t have to wait until they retire.
The second dilemma is the gaining and profitability. With ERISA, the employees are assured retirement income. However, for SEC, securities may generate losses instead of profits .If the two were profit making, a general compliance would be formulated. Johan will find it confusing to incorporate these two, yet the gains for SEC are not guaranteed. A good example was the decline of Delta share prices in the US .The share subscribers who redeemed their shares during that fall period suffered losses.
For SEC investors, there is an element of risk whereas for ERISA there isn’t. People usually have different risk profiles for investments. Johan is likely to encounter a dilemma on how to incorporate the compliance to suit every user. In the SEC sector, more risk averse individuals get high returns. However, if the prices decline, they suffer extreme losses. On the other hand, if the investors risk less, returns are small too.
Lastly, ERISA is transparent in its dealings. The employees subscribe to the plan and portions of their income is deducted and put into the plan. SEC will involve a complicated procedure. Moreover, the sector has so many intermediaries such as brokers, speculators, and arbitragers. That raises another issue.
My first opinion is based on the first issue raised about different portfolios. Since the two offer separate investment opportunities, I would suggest Johan make it optional. That is, the members can subscribe to ERISA, or SEC, or both. If the program is made such that the members can subscribe to both ERISA and SEC, they might suffer losses since securities investments keep on fluctuating. Systematic risks such as changes in interest rates, exchange rates, and government influence significantly affect SEC business. ERISA is only affected by the amount of contribution a member makes. If the program is made optional, every member will have a choice on what investment portfolio to choose.
For the second issue which is based on the profitability. I would suggest that Johan makes it clear to the members that they can invest in risk-free securities. For example, debentures, treasury bonds, and bills. Such securities hardly generate losses. Individuals can confidently buy those particular securities and redeem them in future. It could also be an additional alternative to ERISA. Other securities such as shares may decline over time.
For the risk issue, people willing to undertake the plan must carry out a proper analysis of the securities. It should be based on short-term investment to enable the investors to redeem their investments when risks are small. For example, taking advantage of exchange rates by depositing money in a foreign country’s bank, and then withdrawing when the country of origin faces currency depreciation.
Lastly, the Board of Directors can employ a professional consultant and advisor to assist a member who chooses the SEC initiative. This will reduce transaction charges and fraud which result from the brokers and intermediaries in the market. The expert employed should have all information regarding prices of securities. The compliance program will now be well incorporated.
Johan can use several strategies to make the users of the program of conformity satisfied. For issue number one, he can explain the advantages of investing in the SEC market. For instance, it helps in wealth creation and helps in fighting emergencies and precautionary activities.When one suffers a financial distress, he can redeem the securities back.
For the profitability issue, every member subscribing to the SEC option Johan can recommend them to invest in the risk-free securities. The other securities can be left for the daring members who may want greater amounts of income. However, investing in the debentures and treasury bills would be a good strategy to advise the members.
The final strategy would be the employment of an experienced advisor in the SEC business. The expert would explain to the members the methods of securities analysis such as the fundamental and technical methods. He can also provide records of previous amortization of the particular securities. Moreover, the personnel will eliminate intermediaries for the benefit of the members.
After going through the three sections, I would recommend Johan and Rebecca to use the strategies provided at section three. Such plans would help the members to overcome the issues and complications raised at section one of the memorandum. The compliance program having both ERISA and SEC will yield more profits to the members who subscribe to both.