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SEC Official Reviews Examination Priorities

Mary Ann Gadziala, the associate director of the SEC's Office of Compliance Inspections and Examinations, recently reviewed enhancements to OCIE's examination program and its current examination priorities. The staff has begun to limit the scope of its exams where high quality, effective internal audit work has been performed. Gadziala reported that firms have made a great deal of progress in developing more robust supervisory, compliance, risk management, surveillance and internal audit programs.

Among OCIE's top priorities is supervision, according to Gadziala. The staff looks for complete and updated written supervisory procedures. Branch office supervision is a growing challenge with over 172,000 branch offices now in operation, many at remote locations, she said. In addition, firms are outsourcing more and more activities, which creates additional supervisory issues. Gadziala urged firms to review Staff Legal Bulletin No. 17 which discusses characteristics of good supervisory procedures. The bulletin is a few years old, but remains pertinent, she said.

Suitability and sales practices remain high priorities for the examination program. Gadziala reported that over 100 examinations are underway or have been completed in seven southern states with large retirement communities. The examinations have uncovered some troubling practices with respect to advertising, suitability and supervision, she said.

Gadziala listed a number or products that may raise increased suitability challenges, including 529 plans, variable annuities, real estate investment trusts and mutual funds, where $135 million has been recovered due to breakpoint violations. Mark-ups on fixed income securities are being scrutinized, she added. She suggested that firms refer to the NASD debt mark-up policy published on April 20, 2007 for guidance.

In the area of risk management, Gadziala said that complex structured finance transactions may merit special attention. These transactions have become an important segment of the international capital markets, she explained, while also becoming increasingly complex.

Gadziala reported that the staff continues to find net capital deficiencies and inaccuracies. She said the problem may be heightened where firms employ part-time financial and operational principals. In the books and records area, Gadziala said the staff continues its discussions with the industry about email retention.

Information leakage is a top priority when it comes to trading practices, according to Gadziala. Anti-money laundering compliance is also a priority in the examination program. Gadziala said the SEC and the Financial Crimes Enforcement Network recently entered into an information sharing agreement which should lead to more effective identification, deterrence and prevention of terrorist financing and money laundering.

Gadziala reviewed the staff's efforts to coordinate its examination work with other regulatory bodies. She also reported on a new pilot program involving eight organizations in which the staff collects and analyzes regulatory information on all of the affiliated registered entities in order to risk scope examinations and prevent duplicative work. If the approach is successful, she said it could be expanded.