I just spoke with Jim Leman, principal of Westwater Corp., about some of the things his firm is focusing on as a result of the credit crisis and recent market turmoil. We hadn’t caught up in a while and I wanted to know how the market was affecting his consulting firm.

According to Leman, Westwater has found several opportunities amid the turmoil on Wall Street. First, it has been able to take advantage of some good Wall Street talent that suddenly has become available. The firm hired Peter Jenkins, the former business development manager with the member and institutional community at NYSE. Prior to that Jenkins was the head trader at Scudder Stevens and Deutsche Asset Management. He will be lending his expertise to Westwater’s buy-side and sell-side business development efforts, Leman says.

Westwater also recently hired Abraham Wons, who will assist the firm in developing its risk management practice, primarily in the operational risk management space. Wons was formerly the risk management officer for Wellington Management and, prior to that, for Deutsche Asset Management.

Although technology spending has slowed in many areas, risk management is still getting a lot of attention. "Madoff has thrown the fear of God into a lot of people," Leman says. "A lot of the classic things are still out there, but we think risk management is big and compliance is an important hot button," he adds.

Independent Examinations
The concept of the Securities and Exchange Commission potentially tapping outside firms to surveil securities and investment firms is intriguing, Leman continues. "If the Commission chooses to go that route, Westwater will throw its hat in the ring," Leman says.

Leman began his career as a NYSE auditor in 1972, and he says he believes his firm would be well suited to review firms and offer an independent assessment of risk and compliance.

Leman adds that firms need to have a better grasp of their risk, particularly their intraday exposure, before the SEC comes knocking. "It seems that this might be the next dimension of introspectiveness," he relates. "What are you doing inside your four walls to attend to the knitting?" This is a question firms need to ask themselves, rather than waiting until the SEC comes to them, Leman contends.

He likens this independent evaluation model to an insurance company that sends an adjuster out who makes certain suggestions to bring down your premiums. Leman believes that sooner or later the risk component of the broker-dealer will become a major evaluation component.

He envisions a scenario in which, "If your risk levels are low, according to the independent examiner, you’d only get evaluated every other year," he says. "But if your risk levels go up, the evaluators will have to come more frequently."

Even though the SEC has always conducted examinations, the information never found itself to the end customer, Leman points out. But that could change with a framework like this. "The public will be able to see what they find -- if you don’t have good controls, that will be important," he says.

Fund of Funds Due Diligence
Another new area of focus for Westwater is helping funds of funds scout and analyze their selection of investment vehicles. This concept is a result of so many fund of funds companies having failed to vet their investments with Bernie Madoff, Leman relates.

He explains that Westwater was retained to organize and document the investments of a fund of funds company and thus built a framework that it plans to use when working with other fund of funds firms. The consulting firm retained the intellectual property for that project and felt there would be a demand for this type of service from other fund of fund companies, Leman notes.

"A lot of these guys were not performing due diligence or their ongoing monitoring," he says. "We’re hoping to start talking to people about how we may go in and help them with their fund of funds to demonstrate due diligence -- demonstrate a process -- so they can show they’ve done [their due diligence]."

Westwater’s concept is to use technology to integrate data and map out a process to help firms aggregate all of their investment choices coming in through various channels and continue to monitor them after investments have been made, according to Leman. "Usually funds of funds just have a few tech guys -- these guys usually want customization. We are going after that."