John Walsh, the Acting Director of the SEC’s Office of Compliance Inspections and Examinations gave the keynote address at the National Society of Compliance Professionals (“NSCP”) national conference yesterday.  Mr. Walsh spoke about the top 5 lessons that the SEC has learned from the turbulent past year and what initiatives they are taking to enhance the effectiveness of the SEC’s oversight.   Below, we have summarized the lessons and initiatives that Mr. Walsh spoke about.

Lesson #1: The Commission must be able to have a broader knowledge base when it comes to checking on certain regulatory issues.   In order to facilitate this, they will be conducting more sweep exams on certain compliance areas.  The SEC is formulating specialized groups of staff members with the appropriate expertise to create sweep exams of certain critical areas.

Lesson #2: SEC examiners need better expertise in the subject areas of the firms that they will be examining.  The SEC is going to be making several senior hires for a newly created position called Senior Specialized Examiner (“SSE”).   These individuals will have expertise in specific areas and will hopefully be hired from the private sector.  The SSE’s will get involved with exams to help appropriately  interview the personnel as part a routine exam .  In other words, the SSE interviewing the head of the trading desk will have been a former head of a trading desk so he/she will have the appropriate knowledge to conduct that interview.  The SEC is also making a strong push to integrate the investment adviser and broker/dealer examination teams so firms with IA and BD’s can have a more streamlined and efficient exam.  They are trying to build a new “culture of collaboration” at the SEC so that the SEC will take a more holistic view of a firm when they go in for an exam.

Lesson #3: The Commission must do a better job verifying third party providers as part of an exam.  They have already started confirming counter-parties, custodians, etc and will continue to beef up those efforts.  They will also be conducting third party confirmation of assets.  They will hold conference calls with the third party providers and may conduct minimal to extensive testing on custodial issues.  The SEC may also send out letters to clients as part of this process.   The Commission has posted an informational document on their website about their plans for safeguarding client’s assets through verifications.

Lesson #4: The Commission must not let examiners be intimated.  The SEC recently setup a new internal hotline for examiners that feel that they have been intimated by someone that they are examining.

Lesson #5: The commission needs a better way to review their own internal policies and procedures.  They will conduct an annual compliance review to make sure that their own policies and procedures are up to date.  They will conduct forensic testing just like registered investment advisers are required to do.  The Commission plans on making a senior hire to head up these efforts, hopefully someone with experience conducting annual reviews for a large investment adviser or similar institution.

Mr. Walsh’s speech is a clear indicator that SEC has learned from its mistakes of the past year and is taking a deep, hard look at the way they conduct exams.  He made it very clear that they plan on taking feedback from advisers, clients and other firms to help structure new policies, procedures and tactics that they will use.

In addition to this interesting points made by Mr. Walsh, we highly recommend reading the informational document provided on the SEC’s website regarding the top focus areas of adviser examinations.