The Government Accountability Office (GAO) recently performed a study of the Securities and Exchange Commission’s new risk-based examination of mutual funds, and found that the SEC faces “challenges” in adequately overseeing the fund industry.
While the SEC is now conducting routine exams of those funds and advisors that it deems high risk, and is forming teams to monitor some of the largest advisors and funds, the GAO found that “the resource tradeoffs [the SEC] made in revising its oversight approach raise significant challenges.” The tradeoffs, the GAO said, “may limit the SEC’s capacity not only to examine funds considered lower-risk within a 10-year period but also to accurately identify which funds pose higher risks and effectively target them for routine examination.” Taxing the SEC’s resources even further is the fact that by January all advisors to hedge funds must register with the Commission.
Another problem, according to GAO, is that while the SEC relies on experienced staff to oversee all exam stages, it does not require that supervisors review work papers or document their review. GAO said it found “deficiencies in key SEC exam work papers, raising questions about the quality of supervisory review.” The SEC also does not require written exam plans, which could be helpful in serving as a “guide for conducting exams and reviewing whether exams were completed as planned,” GAO said.
GAO also found that the SEC’s oversight of self-regulatory organizations (SROs) is lacking. To assess SRO oversight of SROs, which include the stock, options, futures, and commodities exchanges, SEC reviews SRO exam programs and conducts oversight exams of broker/dealers, including their mutual fund practices, GAO said. The SEC exams occur every six to 12 months after SROs conduct their exams so that SEC can assess the quality of SRO exams. However, GAO found in 1991 that “SEC’s oversight exams provided limited information in helping SROs to improve their exam quality, because SEC and the SROs used different exam guidelines and their exams often covered different periods.” GAO found that the same problems exist today. Looks like the SEC has some work to do.–Melanie Waddell