National Exam Program

SEC Office of Compliance Inspections and Examinations Issues Risk Alert on Whistleblower Rule Compliance


On October 24, Staff in the Office of Compliance Inspections and Examinations (the “Staff”) issued a National Exam Program Risk Alert announcing that it is examining registered investment advisers and registered broker-dealers compliance with key whistleblower provisions arising out of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Commission recently has brought several enforcement actions charging violations of Rule 21F-17 of the Commission’s whistleblower regulations.


The Staff now is routinely reviewing, among other things, compliance manuals, codes of ethics, employment agreements, and severance agreements to determine whether provisions in those documents pertaining to confidentiality of information and reporting of possible securities law violations may raise concerns under Rule 21F-17.
Section 21F of the Securities Exchange Act of 1934 was added by the Dodd-Frank Act.  To implement Section 21F, among other things, the Commission adopted Rule 21F-173 thereunder which provides that “no person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement . . . with respect to such communications.”


The Staff highlighted that “Recent enforcement actions have identified certain provisions of confidentiality or other agreements required by employers as contributing to violations of Rule 21F-17 because they contained language that, by itself or under the circumstances in which the agreements were used, impeded employees and former employees from communicating with the Commission concerning possible securities law violations. This potential chilling effect can be especially pronounced when such documents (e.g., severance agreements) provide that an employee may forfeit all benefits if he or she violates any terms of the agreement.” Alert.

SEC OCIE Letter on National Exam Program Initiative

On October 9, the SEC’s Office of Compliance Inspections and Examinations (OCIE) sent letters of introduction addressed to the Senior Executives of newly-registered advisers to private funds as part of their nationwide outreach announcing a new initiative under the National Exam Program, in which OCIE will be conducting “focused, risk-based examinations of advisers to private funds.” 

Under this initiative, the exam staff will review one or more high-risk areas of a private fund adviser, which could include marketing materials, conflicts of interest in the portfolio management process, such as investment and trade allocations, safety of client assets in the context of the Advisers Act custody rule, and valuation policies and procedures, especially with regard to illiquid or difficult to value instruments.  As with all OCIE exams, the outcome of the exam could include no findings, an “examination summary letter” of compliance deficiencies, or a referral to the SEC’s Division of Enforcement or another regulator, such as FINRA or a state.  SEC OCIE Letter.

OCIE Issues National Exam Program Overview

On March 13, the Office of Compliance Inspections and Examinations (OCIE) of the SEC issued a National Exam Program Overview setting forth OCIE’s examination results for 2011 as well as detailing the strategic areas upon which the OCIE will focus its 2012 examination efforts for investment companies, investment advisers, broker-dealers, self-regulatory organizations, credit rating agencies, clearance and settlement programs, and coordination with other regulators.  National Exam Program Overview.