Movement Afoot To Dissolve OCIE
Should the SECís Office of Compliance Inspections and Examinations be dissolved and its examiners integrated into the SECís Divisions of Investment Management and Market Regulation?
The idea seems to be gaining traction within the agency, as well as on Capitol Hill.
Just last month, Commission Paul Atkins urged his fellow Commissioners to give "serious consideration" to the idea, saying it could help the agency "provide a more consistent message" to regulated firms and individuals. Integrating examiners into the operating divisions, he said, "could allow for interaction and exchange between the people who write and interpret rules and those who are on the frontlines interacting with registrants and assessing their compliance with our rules." Moreover, an integrated structure could alleviate any inefficiencies caused by organizational barriers between policymakers and inspectors, and could eliminate the potential for "mission creep." Added Atkins: "This is a topic worthy of further serious discussion among the Commissioners."
And what do the other SEC Commissioners think?
According to one industry source, Commissioners Cynthia Glassman, Roel Campos, and Annette Nazareth each have expressed support for the idea of integrating OCIE within IM and Market Reg. Glassman, Campos, and Nazareth did not return repeated calls asking them to comment on the issue.
However, the industry source described the information as "accurate." The source said that itís not yet clear how SEC Chairman Christopher Cox feels about the idea. "Allegedly, itís Cox who hasnít made up his mind yet," said the source.
Enter Representative Vito Fossella (R-NY), a relatively young member of the House Capital Markets subcommittee. Fossella is said to be poised to introduce a bill that would require the SEC to disband OCIE and place examiners within the Divisions.
The industry source speculated that Fossellaís legislation might be a "cover" for Cox to move forward with restructuring OCIE. Having his "buddies on the Hill throw something out" might provide Cox with a rationale for quickly disbanding OCIE, he explained. Cox could argue that rather than allowing the legislative process to "go off half-cocked," the agency should go about reorganizing the SECís inspection program in a reasonable way.
Of course, such speculation may be premature, since the bill hasnít even been introduced yet.
In any event, the source also noted that some industry lawyers have suggested that OCIE be dissolved. "I think there is a sense within the bar . . . that OCIE is just out of control and that they make law through exams." The attitude of some lawyers, said the source, is "enough is enough."
One industry lawyer, Marianne Smythe of Wilmer Cutler Pickering Hale and Dorr, a former director of the SECís Division of Investment Management, said that she supported integrating the SEC inspection staff within the Divisions. "I think that the operating divisions lost a good deal of their ability to know what was happening in the regulated community and to be alert and sensitive to the changes in that community when they lost the inspection offices." Smythe emphasized that she did not mean to criticize the OCIE staff. "Theyíve done an excellent job," she said. However, she added, "I think that some of the difficulties that have arisen in the past few years regarding the ability of the Divisions of Market Regulation and Investment Management to anticipate problems, to be on top of them quickly, comes from having a bifurcated leadership."
Also of note: in a recent policy paper, Peter Wallison of the American Enterprise Institute expressed concern that OCIE functions outside the SEC divisions responsible for regulating or enforcing laws and regulations "and is thus not subject to their priorities." He suggested that the Commission "give some consideration" to folding OCIE into the divisions, so that they can use OCIEís investigation and inspection functions more efficiently.
Of course, thereís some precedent for all this:
OCIE hasnít always been OCIE.
Way back in 1994, examiners worked shoulder to shoulder with rule writers and other policy-making lawyers in the IM and Market Reg divisions. "When I was the director," recalled Smythe, "I regarded my close communications with Gene Gohlke [now an associate director in OCIE] as probably the most important of my communications."
In May 1995, then-Chairman Arthur Levitt established OCIE, tapping Lori Richards to lead the office. In a speech made shortly after OCIE officially launched, Levitt explained that the new inspection office was intended to mirror the increasingly intertwined financial services industry. He noted that a large fund complex might have registered advisers, registered broker-dealers, and even a transfer agent, not to mention funds. "We need to be able to coordinate our inspections so that our teams have the full range of expertise to examine all facets of a companyís business," said Levitt. "We think this will be good for the industry ó by reducing duplication and improving coordination on our side, weíll decrease the time you spend with our inspectors and increase the time you spend on your business," he said. "If anything, our examinations will be even more focused than before."
Interestingly, in that same speech, Levitt acknowledged early concerns that OCIE would "establish policy . . . different from the Division of Investment Management."
Commissioner Atkins first publicly discussed the idea of putting the SECís inspection function back in the operating divisions at this past springís SEC Speaks conference. "An integrated structure could allow for improved interaction and exchange between the folks who write and interpret rules and those who are on the frontlines interacting with registrants and assessing their compliance with our rules," he said.
However, Atkins acknowledged that the "potential benefits from a stand-alone OCIE might weigh in favor of implementing more moderate measures to improve coordination between OCIE and the Divisions." (Notably, Atkins dropped that last bit in his most recent speech on the topic.)
Richards, who also happened to be speaking at that SEC Speaks conference, highlighted some of the benefits of a stand-alone OCIE. Having an independent examination function, she said, clarifies OCIEís purpose. "Weíre not rule writers, weíre not enforcement attorneys. All we do is conduct examinations." That, she said, makes for a stronger examination program. Moreover, having a dedicated examination function allows examiners "to see and spot trends that cross over between legal lines that define registrant status," which she described as "increasingly becoming blurry." With investment advisers looking more and more like broker-dealers, and vice versa, "legal lines sometimes donít matter so much anymore in terms of the actual activities or functions of securities firms."
Richards described a number of common risk areas between "broker-dealer land" and "investment adviser land," such as valuation, best execution, risk of misappropriation of client assets, disclosure of fees and costs, undisclosed payments for business, and soft dollars.
"Seeing these issues with one set of eyes, so to speak, I think helps us to spot trends," said Richards.