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News October 3, 2011 Issue

SEC Officials Outline Examination Refinements

Several SEC officials have spoken in public recently about revisions to the inspection and examination program. These statements are especially timely and important considering that the new national examination program is still taking shape.

Hereís what two associate directors, speaking from opposite ends of the country, had to say about various elements of the SECís refined examination program.

Last month, SEC Denver office associate director Kevin Goodman described enhancements to the adviser examination program before the Ascendant Compliance Management/CFA Institute conference in San Diego.

Goodman said that examination teams would "empower" CFOs by ensuring a firmís senior executives are engaged in the compliance process.

To that end, SEC staff will more routinely interview senior executives as part of examinations, said Goodman. The interviews will help the staff get a sense of the firmís culture of compliance and its approach to enterprise risk management. The interviews will also reinforce the role a firmís leaders play in ensuring overall compliance, he said, and the importance of the CCO function. If information gathered during an examination suggests that a CCO is not fully empowered or respected, the SEC can emphasize the importance of that position in the firm as part of the exam process.

Although a recent initiative involved interviews with mutual fund board members, he did not expect such interviews to become a routine part of the examination process.

Going forward, he expected board member interviews to occur only in "out-of-the-ordinary" circumstances where long-standing problems or questions are present, for example. The decision to question directors would be made at senior levels and possibly across multiple divisions within the SEC, not as an on-the-scene determination by exam staff. It could be reflective of concerns raised by the examination staff, however.

Also last month, OCIE associate director Julius Lehman-Carbia outlined a number of areas of examination focus when speaking in New York before the Compliance and Legal Society of the Securities Industry and Financial Markets Association. Although his remarks were directed to broker-dealers, he offered a number of takeaways for advisers as well.

Ferreting out fraud in the form of ponzi schemes and insider trading, in response to tips, complaints, or other sources of information, and in connection with unregistered entities remains a priority, he said.

The supervision of dual registrants also will be a priority, as will the use of social media.

The SEC is also focusing on ETF trading activity, and activity on alternative trading systems.

Large firms are always of interest to the SEC. This is not a new concept for OCIE, said Lehman-Carbia, but larger firms can pose greater risks simply based on their size, complexity, and connectivity with other large firms and financial institutions.

Lehman-Carbia also noted that OCIE planned to implement greater collaborative efforts with other regulators, including the states.