The SEC’s Office of the Inspector General has issued a report discussing its findings during an audit of the Office of Compliance Inspections and Examinations’ investment adviser examination completion process. While noting the overall effectiveness of OCIE’s controls, the OIG found certain areas of concern in its reporting and documentation processes and recommended improvements to examination reviews and approvals and documentation of meetings and interviews and suggested additional staff guidance concerning assignment of final examination risk ratings.
In its report the OIG found no deficiencies related to investment adviser corrective action reviews closed in OCIE’s Tracking and Reporting Examination National Documentation System (TRENDS), which examination staff uses to document work performed and deficiencies identified during examinations. However, the OIG did identify certain issues in OCIE’s examination completion controls.
First, the OIG found that two controls regarding control sheets and post-exam fieldwork lacked appropriate segregation of duties. Staff members are required to document their actions, analyses, and conclusions in TRENDS control sheets, which are then submitted to an exam manager or assistant director for review. According to the report, in approximately 24 percent of examinations, an OCIE supervisor both submitted and reviewed at least one examination control sheet. No policies and procedures exist to prohibit supervisors from reviewing and approving control sheets and post-fieldwork completion information that they created, the OIG stated, but this dual role means control activities are not operating as effectively as they should. Without a segregation of duties in completion and approval, examination work products may be more susceptible to error, according to the OIG.
In addition, the OIG found that examiners did not always document preliminary exit interviews with examined investment advisers. Although OCIE policies and procedures require examiners to retain interview notes, they do not specifically address documentation requirements or specify expectations for the "exit interview" fields in TRENDS, according to the OIG. Unclear expectations can lead to inconsistent examination documentation and negatively affect examiners’ ability to review prior examination findings and perform comprehensive risk assessments, the report states.
Finally, according to the OIG, examiners did not always assign final risk ratings to examinations and, in some cases, assigned them inconsistently. These final ratings are used in the risk-based examination-selection process, but OCIE policies and procedures do not provide guidance for assigning them, other than to select a rating from a drop-down menu, the report notes. Inconsistent approaches to these determinations could hinder OCIE’s ability to assess and select investment advisers for future examinations, the OIG found.
To address these concerns, the OIG recommended that OCIE design control activities for review and approval of examination work products to require segregation of duties, update policies and procedures to more clearly define documentation requirements for examination meetings and interviews, and develop guidance for assigning final examination risk ratings. OCIE’s Acting Director concurred with the recommendations and noted that management will take steps to strengthen controls and provide additional guidance for examination staff.
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