December 7, 2007
ACA Insight Breaking News - IM Insight Breaking News -- Walsh Describes Changes to OCIE Exam Request Letter
The industry’s strong reaction to the SEC’s New York Regional Office’s lengthy examination request letter has had an effect:
OCIE chief counsel John Walsh today described “extensive” changes to the approach taken by the NYRO letter, which will be rolled out as OCIE’s new standard exam request letter. Speaking at an Investment Company Institute conference in Washington, D.C., Walsh began his remarks by noting that the SEC’s exam program is intended to be flexible and creative not only in identifying emerging risks, but also in responding to them. To that end, OCIE is engaged in a number of pilot programs, whereby a new idea is “road tested” before being deployed nationwide. Recent OCIE pilots, he said, have included short visits of newly-registered advisers and monitoring teams at very large fund complexes.
And, of course, the NYRO letter.
An important part of every pilot, said Walsh, is to analyze how it went. To that end, the NYRO letter has been under review since September 30. OCIE headquarters staff, working together with regional office staff, have been considering what elements of the NYRO letter should be incorporated in OCIE’s nationwide standard exam letter.
As part of that review, OCIE has been collecting comments from industry participants about their experience with the NYRO letter. Walsh reported that OCIE received very good comments, both positive and negative. Some focused on specific items on the letter, while others focused on unintended negative externalities. “To those of you who gave us feedback, we value your comments and we hear you,” said Walsh.
Walsh then proceeded to describe four key ways that the new standard OCIE letter will differ from the NYRO pilot letter.
First, he said, it will be shorter. Walsh acknowledged that issue of the size of the NYRO pilot letter, which at times numbered over thirty pages, had taken on a life of its own. The revised letter, said Walsh, will number somewhere in the teens.
Second, the revised letter will feature a two-step approach to document requests, whereby firms will be asked to answer an initial set of general questions and will not be presented with detailed, follow-up questions unless examiners have a particular concern. In contrast, the NYRO pilot letter used a one-step approach, whereby firms were asked right off the bat to provide detailed data. Walsh explained that the revised letter will allow firms to explain their policies and procedures to address certain risks, and also to explain how particular risks present themselves in their shops given their firm’s unique structure and operations. Based on the firm’s responses to the initial set of inquiries, said Walsh, examiners will decide whether to ask follow-up questions. If examiners have concerns, or if they spot an issue, he said, they will use supplemental requests to drill down and obtain more data. Unlike past OCIE letters, where initial and follow-up questions were presented together, it appears that only the initial set of questions will appear on the revised letter. Interestingly, Walsh said that OCIE was hopeful that many exams will conclude on the first step.
Third, the revised letter makes clear that responses to items can be either oral or written, depending on what the firm feels will work best. Walsh noted that some compliance officers that provided feedback on the NYRO pilot letter actually liked being asked for a written response. Putting an answer in writing, they said, allowed them to control what was presented to the staff, and also allowed firms to bring in outside experts if necessary to develop an answer. From the examiners’ perspective, Walsh noted, written responses provide internal transparency within the SEC’s exam program, allowing both the examiner in the field up to senior OCIE staff in the agency’s Washington, D.C. headquarters to see what, exactly, a firm said in response to a particular question. On the other hand, Walsh acknowledged that some compliance officers found it burdensome to prepare numerous responses in writing. And, he added, some firms found it troubling to be asked to create documents that they didn’t already have.
Fourth, Walsh indicated that the revised letter will eliminate some of the more controversial items in the NYRO pilot letter, such as the so-called “bad thoughts log” item. Walsh noted that that particular item asked people to report only the issues that their compliance program had prevented, and therefore did not require a confession of bad conduct. But Walsh acknowledged that the item did not seem to be working in practice. Walsh did not specify the other items in the NYRO pilot letter that had been removed.
Lastly, Walsh urged the audience to remember that the risk the NYRO letter was intended to address — insider trading — is very real. He said that the exam staff continues to view insider trading as a serious risk and emphasized that the industry needs to be attentive to the issue. Examiners, he said, will continue to look at how firms are preventing and detecting the possible mis-use of material, non-public information. To that end, Walsh suggested that compliance officers use the NYRO pilot letter as a resource. The letter, he noted, contains a number of insider trading tests that firms can use when designing their insider trading program.