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News January 3, 2011 Issue

OCIE Chief Outlines New National Exam Program

Risk-based standards are becoming further embedded in OCIEís standard operating procedures. Changes are coming to the inspections and examinations program in response to Dodd-Frank Act mandates. New faces will be arriving in critical partnership areas of the SEC that may provide new opportunities for collaboration and leadership.

That was part of the message of change delivered by OCIE director Carlo di Florio at the SIFMA Compliance and Legal Society meeting on December 21, 2010. The SECís examination program is evolving, was the overarching message, and registrants need to evolve with it.

Routine exams will give way to strategic, risk-based examinations in a process that has already begun. In that way, OCIE can ensure the appropriate allocation of its resources and "really pick our spots," said di Florio. OCIE conducted a self-examination that produced twenty-five separate initiatives for remediation that will be addressed over the next 18-24 months.

The goal, said di Florio, is to produce a nationwide exam program, complete with a manual and single information technology platform. Staff has been dedicated to ensure consistent overall implementation of the program through monitoring and testing.

As part of the development of this new, national program, OCIE is developing a risk assessment surveillance unit and will analyze data in collaboration with the Division of Risk, Strategy and Financial Innovation. OCIE will hire experts in risk management modeling and technology, structured products, valuation, markets structure, municipal securities and fixed income, di Florio said.

Registrants should be prepared to answer questions in an exam such as:

  • How do the legal and compliance functions oversee risk, and what ability do they have to "push back" if necessary?
  • How does management oversee risk?
  • How does the board oversee risk, and what are its committee qualifications and processes?
  • How does audit monitor conflict areas such as incentive compensation?
  • How does the firm take on and manage risk?

Asset verification remains a high priority, and newly-registered hedge fund managers should be ready for a focus on compliance with the custody rule, he said.

OCIE also plans to assess whether a firm really understands, for example, the liquidity or concentration risks its business or products represent. Portfolio analysis will still analyze performance variations, flagging any "smoothing" of volatility or performance that is comparatively too high.

A reinvigorated SEC has developed a culture of teamwork, collaboration, and has focused on eliminating "silos" of information, he said, including the creation of exam teams with varied expertise and the establishment of a Commission-wide tips, complaints and referrals system.

The SEC is holding itself to the same controls and operational standards as its registrants. di Florio noted the SECís recent appointments to the newly created positions of chief compliance officer, chief administrative officer, chief information officer, and chief financial officer on the staff.

The Dodd-Frank Act will now require private fund advisers managing $150 million or more in assets to register with the SEC. di Florio said that OCIE has been preparing by actively recruiting staff with expertise in this area.

Five new categories of swap registrants and also credit rating agencies will be subject to oversight and examination by the SEC. di Florio said the SEC will need to work together with the Federal Reserve regarding the oversight of clearing agencies, and that OCIE will be considering the impact of that collaboration on exam strategies and scope.