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Regulation and Compliance > Federal Regulation

SEC Revising Its Exam Hotline

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The government accountability Office (GAO) is advising the SEC to relocate its hotline that allows advisors to lodge complaints about an exam to an independent office within the agency, such as an ombudsman function, and outside of the securities regulator’s Office of Compliance Inspections and Examinations (OCIE). Some advisors question the hotline’s independence, GAO says, and are hesitant to use it because it’s housed within OCIE. The SEC is taking heed, the GAO says, and is now developing a revised hotline where callers can choose to speak with the Commission’s Office of Inspector General, in addition to staff from OCIE’s Office of the Chief Counsel.

The GAO is also criticizing OCIE’s new risk-based exam routine. After the mutual fund trading scandals surfaced in 2003, OCIE shifted from routinely examining all advisory firms to a three-year exam schedule for those firms that it deemed higher-risk. In the GAO’s study of OCIE’s exam regime, released in September, GAO said the “effectiveness of OCIE’s revised approach largely depends on OCIE’s accurately assessing the risk level” of investment advisors. The method OCIE uses to assess firms’ risk, however, has limitations, GAO says, “particularly in that this method relies on proxy indicators of compliance risks without incorporating information about the relative strength of a firm’s compliance controls.” OCIE has taken steps, GAO continues, to assess the effectiveness of this method for predicting risk levels “and to seek additional indicators of compliance risks.” The GAO says SEC should, however, implement the GAO’s prior recommendation “to obtain and use compliance reports from firms–a source of information on the effectiveness of their compliance controls–[which] could potentially help OCIE better identify higher-risk firms.”


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