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News June 12, 2017 Issue

More Examinations, Fewer Corrective Actions in SEC Performance Report

Everyone gets a report card of one kind or another, and the SEC is no exception. The agency just reported on how it performed against goals it set for itself – and came out looking, if not perfect, pretty good.

The SEC measures itself against goals previously set for the years 2014 through 2018, and reports on its progress against those goals each year. On May 23, it issued its Fiscal Year 2016 Annual Performance Report, which provides information on how the agency did against its goals set for that year.

The performance goals against which the SEC was measured fall within four broad strategic goals: establishing an effective regulatory environment; fostering and enforcing compliance with the federal securities laws; facilitating access to the information investors need to make informed investment decisions; and enhancing the agency’s performance through effective alignment and management of human, information and financial capital.

"Of 53 total performance targets, the agency met or exceeded 46 and did not meet seven," the SEC said.

The performance report is a useful tool for the SEC and for policy makers, said Ropes & Gray partner Jason Brown. "The agency can use the data to decide where to put resources," such as its past decision to shift examiners from the broker-dealer side to investment advisers. As for policy makers, seeing these metrics "will help inform future decisions, including things like whether third-party examiners are needed."

Performance results

Among the results reported in the report are the following:

  • The percentage of examinations conducted of advisers, investment companies and broker-dealers collectively "exceeded expectations." The Office of Compliance Inspections and Examinations "completed more examinations than in any of the previous seven years," the agency said. A closer look at the results, however, shows that most of the gain came from examinations of investment companies (17 percent received examinations, goal of 15 percent), not advisers (11 percent examined, the same as the goal)or broker-dealers (50 percent examined by FINRA, the same as the goal). Compared with FY 2015, when the percentage of advisers examined was 10 percent, FY 2016 represented a gain, while investment companies stayed the same at 15 percent, and broker-dealers examined dropped from 51 percent. As for future years, the SEC estimates that the percentage of advisers, funds and broker-dealers examined will be, respectively, 13 percent, 10 percent and 48 percent in FY 2017; and, respectively, 13 percent, 10 percent and 18 percent in FY 2018. Included in the measurement are all kinds of examinations, including those based on risk, cause inspections that follow up on tips and complaints, and limited-scope exams to probe emergency risk areas. "During the past year or so, OCIE announced that it was shifting examiners from the broker-dealer side to focus more on investment advisers and investment companies, while relying more on FINRA to examine registered broker-dealers," said King & Spalding partner Alec Koch. "The results appear to reflect a modest shift in that direction, but not as significant as expected. On the other hand, that shift is in its early stages and these percentages depend on changes in the overall numbers of advisers and investment companies, so it may be too early to draw conclusions."
  • The percentage of exams that identify deficiencies, result in a significant finding, or are referred to the Division of Enforcement. As Koch suggested above, these are all trending down. Those that identified deficiencies, for instance, dropped from 80 percent in fiscal year 2013 to 72 percent in fiscal year 2016. Those that identified a "significant finding" fell from 32 percent in fiscal year 2013 (itself a drop from 42 percent in each of the two previous years) to 27 percent in fiscal year 2016. Finally, those that resulted in a referral to the Division of Enforcement dropped from 13 percent in fiscal year 2013 to 9 percent in fiscal year 2016. "All these percentages are trending down," said Koch. "If you’re the SEC, you might argue that the lower percentages are due to all of the staff’s unquestionably laudable outreach to the compliance community. A more skeptical view would be that the effort to make exams more risk-based isn’t working well, because it is not resulting in more exams of wrongdoers."
  • The agency fell short of its FY 2016 goal for the percentage of corrective actions taken by advisory firms. According to the report, 88 percent of firms that received deficiency letters took corrective actions. The goal, however, was 90 percent. Nonetheless, the report notes that "the vast majority of registrants stated they are taking corrective action in response to the staff’s findings. This measure continues to show that registrants are using examination results to improve operations and compliance with federal securities laws." As for improving performance for future years, "OCIE will continue to focus efforts on promoting compliance by improving dialogue and communication with firms, including at the most senior levels. This type of communication will be aimed at ensuring there is a clear understanding of issues between the staff and registrants, with the ultimate goal of increasing compliance efforts or remedial actions taken by registrants." Interestingly, OCIE did meet the 90 percent goal in FY 2015. As for FY 2017, the SEC estimates that the compliance percentage will rise to 89 percent, and that in FY 2018, it will rise to 90 percent.
  • The percentage of enforcement actions for which the SEC obtained relief on one or more claims exceeded the goal set. This metric identifies the percentage of resolved enforcement actions with respect to which the agency obtained a judgment or order and/or the imposition of monetary or other relief. The goal for FY 2016 was 92 percent, and here the SEC came out swinging, with the actual percentage being 97 percent, which was also an increase over the 95 percent reached in FY 2015. "In addition to victories in the cases the agency brings to trial, the SEC’s litigation efforts also help the SEC obtain strong settlements in other cases by providing a credible trial threat and making it clear that the SEC will go deep into litigation and to trial, if necessary, in order to obtain favorable relief," the report says. "The SEC has implemented controls and strategies to resolve actions quickly and on a favorable basis, while at the same time, it does not hesitate to file matters on a contested basis where a favorable settlement was unavailable before filing."
  • Average number of months between opening a matter under inquiry or an investigation and commencing an enforcement action. Most firms would rather not have an investigation drag on too long, but here the SEC failed to meet its goal for FY 2016, which was that no more than 20 months would pass between the opening of an inquiry or investigation and the commencement of an enforcement action. Unfortunately, the actual FY 2016 result was 24 months, the same as it was in FY 2015. "The Division (of Enforcement) is taking measures that include emphasizing expediency in quarterly case reviews, promoting best practices regarding efficiencies in various phases of the investigative process, leveraging data analytics capabilities, and conducting training on tools that expedite investigations," the report says. The SEC’s goals here for FY 2017 and FY 2018 are both 20 months. The Supreme Court decision limiting disgorgement sanctions to a five-year statute of limitations (see related story this issue), might provide the agency with an added incentive to shorten the time period further, said Brown. ?