A Word From the SEC

The foregoing list is a direct excerpt from the SEC Examination Request List, Exhibit D which relates to Internal Controls:

A core factor of the new SEC regulatory environment constitutes “documenting and substantiating the effectiveness of (your) control processes”.

“Policies, procedures and compliance manuals are a useful starting point”.

“You can demonstrate the effectiveness of your control processes by providing:

• Actual exception reports together with documentation of follow-up work
• Completed compliance check lists
• Completed reconciliation files
• Management reports
• Documents containing supervisory approval of overrides in various areas
• Warning or sanction notices to staff that did not follow a procedure
• Periodic analyses of transactions by compliance staff who are searching for patterns or “what if” situations that may need further follow-up
• Results of any such follow-up activities
• Periodic self-assessments of the effectiveness of control processes such as internal audit reports”

In an address given by Lori A. Richards, Director of the Office of Compliance Inspections and Examinations, she underscored the importance the SEC now places on your internal control structure.

“Examination experience shows that Advisers with effective system of compliance controls are much less likely to violate Securities Laws. If violations occur, these firms discover the problem more quickly with less harm. In contrast weak controls indicate undetected violations exist with higher risk to investors.

With the new emphasis on risk based examinations, the SEC shall examine a firm’s controls and procedures to evaluate the effectiveness of the internal controls. Where controls are found to be weak and ineffective or non-existent, the SEC shall deem the firm a higher risk, resulting in more frequent and in-depth exams.”