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News March 13, 2006 Issue

Top Deficiencies Found by OCIE

At the recent SEC Speaks conference, OCIE associate director Gene Gohlke listed top deficiencies found in adviser and fund examinations.

The findings, he said, were "pretty consistent" with what OCIE has found in past years:

Top Adviser Deficiencies:

1. Books and records/disclosures. According to Gohlke, the SEC exam staff frequently found inaccuracies and omissions in Form ADV, most often in the brochure (or Part II) that is provided to clients. Among the deficiencies: failure to adequately disclosure conflicts of interest.

2. Portfolio management. Problems commonly stem from weaknesses in controls and weaknesses in managing conflicts of interest. Gohlke reported that examiners frequently found situations where firms were not keeping portfolio management records up-to-date.

3. Personal trading and codes of ethics. Gohlke indicated that some advisers still are not fully complying with the rule’s requirements.

4. Performance marketing and advertising. Gohlke noted that some firms still are using testimonials inappropriately.

5. Brokerage arrangements. Deficiencies in this area included weaknesses in controls and failure to adequately manage, identify, and disclose conflicts, said Gohlke.

Top Investment Company Deficiencies:

1. Information disclosures, including deficiencies and inaccuracies when reporting and filing information on the prospectus and SAI.

2. Corporate governance. Boards, he said, often do not do everything they should be doing in regard to reviewing and renewing advisory contracts and overseeing activities of the fund advisers.

3. Portfolio management.

4. Brokerage arrangements.

5. Personal trading and codes of ethics. Gohlke reported the failure of some funds, or CCOs, to adequately monitor the trading of access persons.

In addition, OCIE chief counsel John Walsh noted a number of areas that SEC examiners will be looking into in the coming year. Among them: Outsourcing (a.k.a. offshoring). Examiners are looking at outsourcing "particularly from a Reg. S-P perspective," said Walsh. "Are people protecting their customers’ information" wherever it is assembled?

Walsh also said that examiners would continue to focus on identity theft. "We have noticed what appears to be real upsurge in identify theft, particularly in account takeovers," he said.