Speech by SEC Staff:
The Securities and Exchange Commission disclaims responsibility for any private publication or statement of any SEC employee or Commissioner. This speech expresses the author's views and does not necessarily reflect those of the Commission, the Commissioners, or the other members of the staff.
Thank you for inviting me to speak to you today about the regulatory examination program of the SEC's Office of Compliance Inspections and Examinations (OCIE). It's always a pleasure to address fellow legal and compliance colleagues.
Since our topic is "Regulatory Examination Programs - Focus and Significant Findings", I thought I would spend my time with you today discussing three key areas related to OCIE's broker-dealer examination program: first, how we perform risk assessments to focus our examination program and establish priorities; second, some of the priorities that are currently the focus of our examination program; and third, some of the challenges to creating and maintaining an effective legal and compliance program at a broker-dealer. These challenges are primarily based upon findings from OCIE's comprehensive compliance examinations conducted over the past several years.
I'll begin with our risk assessment process. This involves a wide variety of activities - some formal and more scientific and others more informal and somewhat subjective. We have implemented a process that permits all SEC examiners nationwide to identify what in their view are the most significant risks to investors, registrants, and the markets. This information is analyzed by OCIE's senior management. We use this analysis to assist in setting examination program goals and priorities - to decide if sweeps on focused areas may be appropriate; to determine where interpretations, new rules, or investor education may be recommended; and we use the information in speeches such as this to inform the industry and general public of risks and concerns we have identified. This is intended to be a proactive process - assisting in preventing violations from becoming significant or recurrent - or suggesting improved controls that may prevent some violations from occurring at all. We began this process in 2004 and conducted another in 2005.
Another process utilized in our examination program risk assessment is analyzing examinations themselves. One important element we consider is "significant findings" from our prior exams. In reviewing the significant findings from more than 750 exams we conducted over the past year, the most common involved:
In addition to these analyses, all examination staff also monitor news, new products and activities of firms, recurrent problems, trends, academic studies, and information they just "hear on the street". This information is shared with all other examination staff through memoranda, emails, monthly conference calls, and meetings with SEC examination staff nationwide. It is used in risk assessment as we continually reassess examination priorities and the firms selected for examination.
OCIE also receives significant risk focusing information from other SEC offices, including the Divisions of Enforcement, Corporation Finance, Market Regulation, and Investment Management, and the Offices of Economic Analysis and Investor Education and Assistance (which receives and analyzes investor complaints). We also have frequent consultations with bank regulators and discuss risk-related matters with state securities and insurance regulators. And of course, we have numerous discussions with the industry and have learned a great deal from open communications on significant issues. For example, our discussions with firms on conflicts of interests provided invaluable insights on the diverse activities of large firms and the potential conflicts that may arise as they serve the various interests of many different customers.
All of this risk assessment analysis is used together with other information to assist us in developing examination priorities. Among our examination priorities are:
My third and final topic, which may be of particular interest to this group, are some of the challenges that firms face in developing and maintaining effective legal and compliance programs. These were identified primarily through the results of our comprehensive compliance examinations. They fall into five general areas and I will mention some challenges under each of those areas.
1. Identification and Control of Compliance Risks
2. Senior Management's Role
3. Compliance Programs
4. Business Supervisory Function
5. Employee Supervision
In conclusion, firms, markets, products, laws, customer activity, operations and technology are all changing at a rapid pace. In addition, we are at risk for the occurrence of unpredictable events that may significantly impact a firm's risks and overall market risks. For example, the potential implications of a pandemic should be a high priority for consideration by all control areas of a firm - including legal and compliance. No one can deny that all of these pose significant regulatory challenges. Open communications, proactive risk assessment, and appropriate and timely responses by regulators and firms are critical to ensure that the integrity and stability that have been the hallmarks of U.S. markets continue for decades to come. Thank you for allowing me to share some of my thoughts on the importance of regulatory vigilance.
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