PHOENIX - The SEC's Office of Compliance Inspections is increasingly bringing along representatives of the Division of Enforcement into its examinations of brokers and advisors.

The practice was billed as an example of more “collaboration” between examiners and enforcers, at the Investment Company Institute’s Mutual Funds and Investment Management Conference here by Andrew Bowden, associate director of the Investment Advisers and Investment Companies Office of Compliance Inspections and Examinations at the SEC, and counterpart Robert B. Kaplan,
co-chief of the Asset Management Unit within the Division of Enforcement 
at the securities regulator.

But the practice is a sign of a “tilt toward enforcement’’ that appears to be developing out of this collaboration in examination, in the eyes of Ari Gabinet, 
general Counsel in the asset management operation of OppenheimerFunds, and John H. Walsh, a partner in the financial services law firm
Sutherland Asbill & Brennan LLP.

The appearance of an enforcement person at an exam “unequivocally” is not a “precursor to enforcement,’’ said Bowden. And it should not have a “chilling effect” on the exam.


“It shouldn’t be perceived as every examination is the initiation of an enforcement action,’’ Bowden said.

That said, he added, however, if you’re a corporate office in legal or compliance roles, “an exam has historically potentially been something that could lead to an enforcement activity. And I feel like as legal and compliance person in the firm, you are always aware of that.’’

The minute you get a letter that you are being examined, “you are at DefCon1,’’ he said, dealing with it as seriously as possible. “If you’re at DefCon1, you can’t get more on guard on an examination, than you (already) do.”

There is “more collaboration in aligning priorities as part of chairman (Mary L.) Schapiro’s ‘one-commission’ view that we should as divisions and offices cross-execute on each other’s priorities and we do work initiatives jointly,” Kaplan said.

That means more meetings between OCIE and Enforcement on “effective ways to identify misconduct and pursue it”; learning how OCIE works by accompanying its examiners on exams; and pursuing some investigations collaboratively, Kaplan said. But exam selection is not part of the process.

Exams, Bowden said, remain mechanisms for seeing how SEC rules are getting applied, collecting information that can inform SEC policies, performaing “thematic sweeps” on developing issues and learning about business practices.

The exams are to promote compliance, prevent fraud, enforce policy and identify risks. But the inclusion of enforcement personnel in the exam process in the field is “primarily for building relationships” inside the SEC and for information sharing, he said.


Maybe so, Walsh said. But the SEC has adopted a “risk-based” approach to picking firms to target for reviews, he said. And the SEC’s own numbers support the idea that there is a “tilt toward enforcement” coming out of the exam process.

In March 6 testimony before the 
Subcommittee on Financial Services and General Government 
Committee on Appropriations
of the House of Representatives, for instance, Schapiro noted:

Over the past three years, we have focused intensively on revitalizing and restructuring the enforcement and examination functions. We also have taken steps to enhance safeguards for investor assets, improve internal collaboration within the agency, and improve our risk assessment capacity. These efforts are producing demonstrable results. For example, during FY 2011:

The Commission filed 735 enforcement actions—more than ever filed in a single year in SEC history. The SEC was better able to discover and stop illegal activity earlier and obtained more than $2.8 billion in penalties and disgorgement ordered. Among the cases filed in FY 2011 were 15 separate actions related to the financial crisis, naming 17 individuals, including 16 CEOs, CFOs, and other senior corporate officers. To date, the SEC has filed financial crisis-related actions against 95 individuals and entities, naming nearly 50 CEOs, CFOs, and other senior corporate officers. In FY 2011, the number of enforcement actions related to investment advisers and broker-dealers also grew, with a total of 146 enforcement actions filed related to investment advisers and investment companies, a single-year record and 30 percent increase over FY 2010. The SEC also brought 112 enforcement actions related to broker-dealers, a 60 percent increase over last fiscal year.

We implemented a more risk-focused examinations program and completed over 1,600 oversight exams designed to detect and prevent fraud, strengthen industry compliance, monitor new and emerging risks, and inform policy. This risk-focused examination strategy resulted in improved guidance to the financial industry about risky practices and actionable information for enforcement investigations.

Walsh suggested that the “routine exam is gone” and that when examiners go out into the field, they are now responding to “risk signals from headquarters” on risks to the investing public or market integrity.

“Not only is this a new approach,’’ he said, ''but the entire program is responding to it.’’

This approach is due to reductions in manpower at regulatory bodies, Bowden said.

Bowden said the question is: Who should we examine with the limited resources we have and when we show up, what should we look at?

“All of life is a capital allocation,’’ he said.

Lack of resources is playing a key role, Walsh acknowledged. But it’s a “major strategic change” that is akin to adopting state regulators’ approach to malfeasance, working closely with their attorneys general offices. That is a “cause-driven” approach, that is “responding to a risk signal,’’ Walsh said.

If firms were being told enforcement is coming and what is being looked at – what the signals are – that would be okay. But that is not happening, Walsh said.

Every time you’re talking to an examiner you are not necessarily talking to enforcement, Kaplan said. But you are talking to the commission.

The best use of limited resources is understandable, said Gabinet.

But the “the idea that with limited resources, you got to go where you think the most fertile ground is going to be” made Gabinet worry that new forms of fraud won’t be found.

“The horse you are looking for is already out of the barn,’’’ he said, “and you’ll be identifying risks and looking at risks that you know, from looking backwards.”


No approach is perfect, Bowden said. Random exams will continue, so “eureka” findings will come.

Regional offices that haven’t visited a company in 10 years, he said, will say to themselves “we probably should go.”

“I don’t think that opportunity is lost, completely,’’ he said.

Tom Steinert-Threlkeld writes for Securities Technology Monitor.







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