For a registered investment adviser, it’s okay to have the SEC’s Office of Compliance Inspections and Examinations visit you. It’s a big problem if the enforcement division visit. OCIE will issue a deficiency letter asking you to fix any deficiencies it finds. If your noncompliance is serious or the examiners think investor funds are at risk, OCIE can refer the case to the enforcement division.
We get to see how well this referral process works as part of a recent Inspector General Report: OCIE Regional Offices’ Referrals to Enforcement (.pdf)
This report was triggered by the fallout from the Stanford case. “The OIG found that the SEC’s Fort Worth regional office had been aware since 1997 that Robert Allen Stanford was likely operating a Ponzi scheme. The investigation also discovered that after a series of OCIE examinations of Stanford Group Company (Stanford’s registered investment advisor) in which each examination concluded that the likelihood of a Ponzi scheme or similar fraud existed, the SEC’s Fort Worth Enforcement unit did not take significant action to investigate or stop such expected fraud until late 2005.” The allegation against the Fort Worth enforcement office is that they were being judged on the number of cases they won. They wanted to stay away from Stanford because is would consume lots of resources and had an uncertain outcome. The OIG claims there was perception that they only wanted “quick-hot” or “slam-dunk”cases.
The OIG report’s objective was to determine “whether and to what extent OCIE examiners were frustrated in matters other than Stanford where Enforcement did not pursue cases identified by examiners in the SEC regional offices.”
One highlight was that the OCIE staff identified thethe SEC’s Asset Management Unit as having significantly assisted with the acceptance rate of referrals.
They also highlight the the different missions and focuses of OCIE and Enforcement: “OCIE focuses its efforts on assessing whether SEC registrants are in compliance with securities laws, while Enforcement’s mission is to protect investors and the markets by investigating potential violations of securities laws and litigating the SEC’s enforcement actions.”
