Congressman Vito Fossella (R-NY13) joined Ranking Member of the House Financial Services Committee, Congressman Spencer Bachus (AL-06), today to release a General Accounting Office (GAO) report that shows new policies at the Securities and Exchange Commission (SEC) have improved communication between the agency and registered entities. Several of the new policies came in response to legislation Fossella introduced in 2005.
The report also called for creating an independent office or ombudsman for investment advisors, investment companies and broker dealers to field questions about regulatory compliance and complaints about procedure – another recommendation offered by Fossella in 2005.
Fossella said “I am pleased by GAO’s findings and I commend Chairman Cox for his efforts. Communication between the SEC and registered firms is improving – an outcome that is in the best interest of investors and in creating a more amicable regulatory environment. While the GAO report shows significant progress, there is certainly still room for improvement. The SEC should continue to work towards an open-door policy that keeps registered firms informed about proceedings and encourages them to come forward with compliance questions without fear of retribution.”
Ranking Member Spencer Bachus said, “The SEC is to be commended for instituting a series of initiatives to enhance transparency, improve communication and in doing so improve attention to compliance with the securities laws. Specifically, the SEC should relocate its complaint hotline to an independent Division to encourage full and open communication between the SEC and market participants.”
The GAO report reviewed changes implemented by the Office of Compliance, Inspections and Examinations (OCIE) in 2003 to the examination approach for investment companies and investment advisers, OCIE’s compliance with exit procedures and reforms OCIE has implemented since January 2006 to enhance communication with registrants. The 2006 reforms, which Fossella unveiled in late 2005 as part of The Inspections and Examinations Reorganization Act, included a requirement that examiners contact registrants when examinations extend past 120 days, new tools and protocols designed to reduce duplication of examinations and the establishment of a hotline for comments or complaints from registered entities.
Specifically, Fossella asked GAO to review whether registered entities were notified when an examination was completed out of concern that examinations were left ongoing for months without an exit notification to firms.
The GAO report found that examiners conducted exit interviews for 79% of the examinations completed between Fiscal Year 2003 and 2006. (Interviews were not conducted in 21% of the cases for reasons consistent with agency guidance or because the examination was part of a larger review.) The GAO also reported that examiners sent either a deficiency letter or a “no further action” letter in 87% of examinations (Letters were not sent in 13% of the examinations for the same reasons cited above.) On this matter, the GAO concluded, “OCIE generally followed its new procedure requiring examiners to inform registrants of the status of examinations extending past 120 days…”
However, GAO also noted that in the wake of the late trading and market timing abuses uncovered in the mutual fund industry in 2003, OCIE initiated a policy in 2003 and 2004 not to issue closure notifications in sweep examinations without informing registered entities of the policy change. The GAO report said, “OCIE officials told us that they did not inform the industry of their decision to forgo exit procedures for many of these sweep examinations, a situation that various industry participants told us confused the firms because they did not receive information on the status or the outcome of the examination.”
The GAO also reviewed 13 closed examinations that had lasted 120 days or more between July 31, 2006 and February 2, 2007, to determine whether examiners were following new notification procedures. The GAO found that in seven of those cases, examiners either contacted the firm by the 120th day or had ongoing communication with the company. In five of the cases, examiners did not provide the 120-day notification for “allowable reasons.” In the remaining case, the examiners did not contact the firm by the required 120 day deadline.
The GAO report raised concerns over the independence of the examination hotline that was established to give registered entities a tool to communicate concerns or complaints about the examination programs or obtain information or clarification on SEC regulations. The hotline is operated by attorneys in OCIE’s Office of the Chief Counsel. The GAO recommended relocating the hotline to an independent office such as an ombudsman or within a division or office that is independent of OCIE.
