SEC examinations grow aggressive, sometimes intrusive – industry panel

May 15, 2015

Gone are the kinder, gentler days when it comes to onsite examinations by the Securities Exchange Commission, say senior compliance officers, who portray the agency’s recent behavior as much more aggressive, and at times even intrusive on a firm’s time and resources.

At a New York conference sponsored by the Regulatory Compliance Association this week, industry participants heard of recent examples of SEC exams where compliance officers described strained and tense interactions with the agency’s staff.

“Some SEC examiners were aggressive to the point of people being frightened,” said Scott Pomfret, chief compliance officer of Highfields Capital in Boston.

SEC exams can often come about with little notice, and can last anywhere from one or two days to as many as two years, depending on the scope of the investigation and what examiners are looking for, said several participants in a panel on SEC examination practices.

One of the most onerous requests can be for past email communications, with some citing examples of where examiners wanted the email records for an employee going back as much as three years. In some cases, the firm was able to whittle down email requests to a more manageable time frame, but one had to be careful not to appear obstructionist.

“I think there is a clear benefit in establishing credibility and transparency with examiners,” said Bruce Karpati, global chief compliance officer for KKR, the private equity and investment firm. Karpati, who once had a senior role at the SEC’s Asset Management Unit, also acknowledged that SEC exams could at times come about for no particular reason, with examiners seemingly in search of something to pin a firm on.

“The threshold to bring an enforcement referral is so low today,” said Karpati.

Meanwhile others complained of the amount of effort required to engage with examiners, some of whom came across lacking knowledge of the firms and businesses they oversee.

“Intrusiveness is not just time and resources,” said Christopher Wells, partner at the law firm Proskauer. “There are still significant gaps” in the knowledge of examiners of certain businesses, he added. Still, others said there was a noticeable increase in recent years in the expertise and knowledge examiners have, with greater sophistication in areas such as high frequency trading.

SEC spokesman John Nester declined to comment on the suggestion exams had become intrusive.

The SEC outlines its exam priorities each year, which gives the industry a broad guide for preparations. Priorities announced in January for 2015 include treatment of retail investors and structural risks. However, the SEC said then, “our staff will also conduct examinations focused on risks, issues, and policy matters that arise from market developments, new information learned from examinations or other sources, including tips, complaints, and referrals, and coordination with other regulators.”

Elcin Yildirim, acting assistant director of the SEC’s quantitative analytics unit, did not address the characterization of the exams.

He told the panel, however, that the regulator was making notable strides in bringing onboard individuals who had high-level industry expertise, some of whom reside in the unit that he manages.

“Modern finance is built by financial engineering,” said Yildirim. “We as regulators need to catch up with that and need to understand what ‘black boxes’ are.”

One of the high-tech tools used by the SEC is called NEAT, or National Exam Analytics Tool. The powerful software application was launched last year and allows examiners quickly analyze massive amounts of trade blotters at brokerage and other Wall Street firms. The key to the software is not only its ability to ingest large amounts of trades – something that Excel, for example, would be limited in achieving – but also to make sense of the data.

“NEAT allows exams to be more data-driven,” said Yildirim, adding that his team participates in onsite exams, mostly at the larger brokerage firms.

Avoid combativeness at all costs

If there was one agreed message from the panel to the audience, it was to avoid confrontation with examiners at all cost. Firms that sought to cooperate and establish a working relationship with examiners stood a better chance of coming out with flying colors than those who put up road blocks to the information requested.

“The last thing you want is a tone of combativeness,” said Wells of Proskauer.

“The intangibles (such as transparency and cooperation) make all the difference and can be a game-changer,” added Karpati of KKR.

(This article was produced by the Compliance Complete service of Thomson Reuters Accelus. Compliance Complete provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges. Follow Accelus compliance news on Twitter: @GRC_Accelus)

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