"The reception we've had from central bankers, regulators, key employers and universities in Latin America has been overwhelmingly positive"

- Friday, February 25, 2011

Latin America has been seen to be on a path of greater financial connection and transparency, with the growing interconnection of capital markets. But there have also been signs of trouble, after the 2.5bn-real (US$1.5bn) emergency capital injection into Brazilian bank PanAmericano in November after accounting fraud on loan book sales, as well as the now infamous fallout from the scandals of Bernard Madoff and Stanford Financial.

BNamericas spoke to Bob Johnson and Gabriela Franco of the CFA Institute to discuss what professional training and designation can do to transform the conditions that make such frauds possible and gauge progress in engaging the region's investment professionals and regulators.

BNamericas: Latin America has been subject to many accounting and investment frauds in the last two years, with the notable cases of PanAmericano in Brazil and Madoff and Stanford Financial across the region. What do these incidents show us about the weaknesses in Latin American countries?

Johnson: You're absolutely right, and I think that the tentacles of Madoff, Stanford and other Ponzi schemes and investment frauds show that someone entrusting their funds to someone else to manage needs to know who that person is, what kind of organization they are with and, most importantly, what their ethics are.

I think the investment profession has to look at the deficiencies in ethics, competency and incentives, and I think our organization has a lot to say about all three. We really believe that this latest crisis points out the need for clients to seek out true professionals.

BNamericas: Specifically for Latin America, what are the lessons?

Johnson: The region is looking to attract capital flows, and having these aspects [in your investment professionals] and having transparent financial markets are extremely important, particularly now. We've seen that [there is tremendous interest in demonstrating commitment to these principles] in a number of countries in the region, including Peru, where [securities regulator] Conasev has been working with us to set regulatory standards that are best practices globally.

Franco: We have visited all the regulators in the region. Everyone seems to be very interested in signing the same type of agreement we have with Conasev. And this is not just rewriting the regulation to include professional designation, but also setting [global investment performance] GIP standards for measuring performance of pension and mutual funds.

BNamericas: An issue that has caught everyone's attention in recent months has been the developing PanAmericano scandal, in which the central bank BCB discovered accounting issues that misstated balance sheets by billions of reais. In the resulting sell-off, the stock dropped 40% in a few days, although it has shown signs of recovering. Federal savings bank Caixa Econômica Federal is also looking at a major investment loss on its purchase of a 36% overall stake in the company, and later found itself on the hook to back the bank's finances. Is this a regulatory issue that should be caught by central bank staff, or is it one in which the CFA Institute and other organizations play a more direct role?

Johnson: Yes, there is a direct role for investment professionals if they have information to bring to light, but we also are working with regulators around the world to make sure they are more educated on these issues. So one issue that we see globally is that regulators often come from the legal profession, and lawyers are not financial analysts and may not understand the financial instruments out there.

In the Madoff case, the regulators were relying on Madoff to explain his strategy to them. We provide scholarships to regulators to CFA programs, so that they can have the same knowledge as the people on the other side. That's the case in Chile and Peru, and we're seeing more interest from Latin America. This is one of the strongest points I can make - we need to have strong regulators.

Franco: It's a two-way street, since they seek our advice on technical and day-to-day issues, but we also learn what are the most difficult issues right now [to inform our work as educators and standards-setters].

BNamericas: So, what's the takeaway? Did the system work here, in that it was caught by the central bank, or is there something else to be learned?

Johnson: You could make the case that the system worked, but what about the timing? How many people got hurt because of finding it so late? I think what this shows is that the stakes are higher, so we have to be more vigilant. The more people who embrace our code and these standards - not just ours at CFA Institute, but higher standards in general - the better the markets are going to operate, and that will lead to peer pressure to improve.

One of our issues in Brazil is that we are still so under-represented compared to similar-sized markets in the world. We have 150 CFA charter members in Brazil, but in Canada, which has a similar-sized financial services industry in terms of professionals employed, we have 13,000.

BNamericas: So what's the path forward on this issue?

Johnson: Well, the reception we've had from central bankers, regulators, key employers and universities in Latin America has been overwhelmingly positive. The need to raise standards in the investment industry is no different than in the US or in the Far East, for that matter, and I think there is a lot of potential to make a difference.

AboutBob Johnson, Gabriela Franco

Bob Johnson joined CFA Institute in September 1996 and now oversees education, advocacy, and developing the organization's Americas strategy. He has taught finance at Creighton University and was president of JBK Capital Management, as well as a financial consultant for Kutak, Rock & Campbell.

Gabriela Franco joined CFA Institute in 2009 as an independent consultant to put together a strategic plan for Latin America to be approved by the board in May 2010, when she was appointed regional head. Franco has worked at Citibank Argentina, Santander, Consultatio Asset Management and Invesco.

About the company

CFA Institute sets ethical, educational and professional standards for the investment industry, offering two education and credentialing programs: the CFA Program, which confers the chartered financial analyst (CFA) designation, and the certificate in investment performance measurement program, which confers the CIPM designation.

The institute has 1,050 members in Latin America and the Caribbean and has seen strong growth in membership in the region, doubling its presence in Brazil since 2005, for example.