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News September 26, 2005 Issue

SEC Exam Scorecard Revealed!

For apparently the first time, the SEC’s "risk scorecard," used to score advisers and funds, has been made public. The outing came courtesy of GAO, which reprinted the scorecard in its report on OCIE’s examination of funds and advisers (see page 24). GAO’s helpful suggestion to the SEC in this regard: OCIE supervisors should initial completed scorecards to indicate that they have reviewed them.

Much more helpful to advisers, of course, is seeing the scorecard in print for the first time.

As GAO noted in its report, SEC examiners use the scorecards "to guide and document their assessment of the effectiveness of a fund’s compliance controls" (of note: GAO said "funds" where it really meant "funds and advisers," we’re told.) Based on the scorecard assessment, "examiners assign the fund an overall compliance risk rating of low, medium, or high." The overall risk rating is the score that OCIE uses to determine how frequently a firm will be examined.

The scorecard also helps the SEC determine what specific areas to review in-depth during an exam. "If controls in an area are strong, examiners may do limited or no additional testing to detect potential abuses, but if weak, additional testing is expected to be performed," noted GAO.

The strategic areas covered by the SEC’s scorecard, as of April 2005:

  • Firm maintains a strong compliance culture;
  • Minimize ability of dominant individual to override control system;
  • Consistency of portfolio management with clients’ mandates;
  • Order placement practices consistent with seeking best execution and disclosures;
  • Personal trading of access persons is consistent with code of ethics;
  • Fair allocation of blocked and IPO trades;
  • Fund/advisory clients’ assets are priced and fund net asset values are calculated accordingly;
  • Accuracy and fairness of performance information;
  • Information that is created, recorded, maintained, and reported is protected from unauthorized alterations;
  • Safety of clients’ funds and assets;
  • Third party sends periodic account statement to clients;
  • Fund/shareholder order processing and cash-book reconciliations; and
  • Fund corporate governance.