Practising Law Institute



From PLI’s Course Handbook

Fundamentals of Investment Adviser Regulation 2009

#18825

9

overview of sec inspections of investment advisers and mutual funds

Christopher S. Petito

Dewey & LeBoeuf LLP

April 30, 2009

I. Overview of Regulatory Inspections

A. Section 204 of the Investment Advisers Act of 1940 (the "Advisers Act") authorizes the SEC to conduct “at any time or from time to time” a “reasonable periodic, special or other examination” of an investment adviser’s records “as the Commission deems necessary or appropriate in the public interest or for the protection of investors.” Section 31(b) of the Investment Company Act of 1940 (the "1940 Act") requires that investment companies (and their investment advisers and certain other persons) make available for the staff's inspection books and records that they are required to maintain under the 1940 Act.

B. The SEC staff has stated that the purposes of the inspection program are to (a) detect compliance problems and violations, (b) detect weaknesses in internal controls and compliance systems that could lead to securities law violations, and (c) seek to identify new areas of compliance risk. When the inspection staff finds problems, they most often instruct the firm to take corrective action, take any remedial action, and improve their compliance procedures in the affected areas.[1] More serious problems discovered in regulatory inspections can be expected to be referred to enforcement staff for further investigation and possible enforcement action.

C. Examinations of investment advisers and investment companies are conducted through the SEC's Office of Compliance Investigations and Examinations ("OCIE") in Washington, D.C. and in regional offices nationwide. During 2007-2008, OCIE’s staff conducted reviews focused on insider trading, distribution arrangements, trading practices, compliance programs, performance advertising, protection of customer information and business continuity plans, among other areas.

D. In fiscal year 2008, the SEC inspection staff conducted 1,521 investment adviser inspections. Of these, 4% resulted in referral to the SEC's enforcement staff for further investigation.[2] Complaints against investment advisers and investment companies in fiscal year 2008 ending September 30 made up 13 percent of the enforcement caseload, up from 12 percent in 2007.[3]

II. Types and Scope of Inspections

A. The SEC conducts three types of inspections: routine, cause and risk-targeted or sweep inspections.[4] Routine inspections are conducted periodically to cover a wide range of issues. Cause inspections are conducted when the staff has reason to believe that there is a specific problem at a firm. Cause inspections may be triggered by complaints, tips, news reports, other regulators or other indications. Risk-targeted or sweep inspections are special reviews to look at a single issue at multiple firms. They may be conducted to gather information as to the extent, scope and danger of new risks among regulated entities.

B. To determine the frequency of routine examinations, the staff uses a risk-based methodology to divide the investment adviser population into high, medium, and low risk groups and conducts routine inspections of firms in each group.[5] The staff bases its classification on an analysis of filings with the SEC as well as the results of past inspections. Firms having higher risks are rated using a number of criteria including: receipt of performance based fees; sale by an adviser to its clients of products or services other than its investment advise; principal or agency cross transactions by an adviser; payment for client referrals; and disciplinary history.[6] The SEC exam staff has indicated that it plans to conduct routine exams of investment advisers with a higher risk profile every two to three years.[7] Other investment advisers with a lower risk profile are not examined on a cyclical basis but instead are to be selected for examination on a random basis. The SEC has assigned monitoring teams to focus exclusively on large fund firms.[8]

C. The SEC staff uses a tool known as the "Risk Assessment Database for Analysis and Reporting" or "RADAR" to identify particular issues for focus during examinations.[9] SEC examiners use this tool to identify risks observed in examinations, assess the probability of a risk's occurrence and its likely impact, and propose potential responses. RADAR enables OCIE to identify and prioritize compliance risks for attention in the inspection program, investor education or other regulatory actions. Focus areas identified through the RADAR process are addressed in routine inspections or special sweep inspections. In 2008, OCIE expanded the information it collects and analyzes using RADAR, and it intends to further expand this capability in 2009.[10]

D. In 2007, the Government Accountability Office (“GAO”) conducted an audit of OCIE’s inspection procedures to evaluate, among other things, OCIE’s risk-based inspection approach and its classification of advisers as high-risk or low risk.[11] In its report, the GAO noted that OCIE may have misclassified some advisers because it had been necessary to rely upon publicly available information for many firms that had not been routinely examined since OCIE adopted its risk-based approach. As a result, the risk classification could not take into account the effectiveness of the adviser’s compliance controls. In order to improve the accuracy of the risk classifications, in 2006 OCIE conducted a sweep examination of a sample of newly registered investment advisers. OCIE is using the results of these examinations to determine whether to reclassify the advisers and to refine its risk classification process.

E. Inspections may be announced or unannounced. Typically, prior to inspection the staff will notify the registrant and request the production of documents or other information and set a date for the inspection. However, cause inspections usually are commenced without notice. The staff is not required to give prior notice.[12]

F. Inspections, even routine inspections, are limited reviews. They are not audits and are not all-encompassing in scope. Instead, inspections focus on areas that in the staff's view appear to pose the greatest risk to investors. These issues may change over time. New issues may be addressed through sweep inspections or by adding new areas to routine inspections.

G. Inspections tend to focus on current common areas of deficiency and other issues named by SEC staff. In 2008, the SEC staff focused on the following issues:

a. Portfolio management;

b. Brokerage arrangements and best execution;

c. Trade allocation;

d. Personal trading by advisory firm personnel;

e. Pricing of clients’ portfolio and calculation of net asset value;

f. Information processing and protection of customer information (books and records, disclosures and filings);

g. Performance advertising, marketing and fund distribution activities;

h. Safety of clients’ and funds’ assets;

i. Fund shareholder order processing;

j. Anti-money laundering; and

k. Fund corporate governance.[13]

H. In speeches earlier in FY 2009, OCIE staff has indicated that OCIE can be expected to continue to focus on these areas, as well as the following areas:[14]

a. Financial controls;

b. Sale of structured products;

c. Controls and processes at recently merged or acquired firms;

d. Money market funds;

e. Short selling;

f. Suitability and appropriateness of investments for clients;

g. Undisclosed payments;

h. Disclosure;

i. Custody of client assets; and

j. Adequacy of compliance resources.

I. In addition to looking at the effectiveness of investment adviser and mutual fund compliance programs, the staff can also be expected to focus on the firm's annual review process. Advisers Act Rule 206(4)-7 and Investment Company Act Rule 38a-1 each require firms to review at least annually their compliance policies and procedures. In a subset of the mutual fund and investment adviser industry reviewed in mid-2006, 40% of firms received deficiency letters that the annual review was not performed, or not performed in a manner consistent with the requirements of the applicable compliance rule.[15]

J. The SEC also is planning to institute a new examination practice in which examiners directly confirm the existence of client assets.[16] To confirm account balances shown in an adviser's records, SEC examiners may contact third parties such as bank and broker-dealer custodians, account administrators, hedge fund investors, advisory clients, derivative counterparties, and hedge fund administrators. The SEC is considering implementing this practice because many recent cause examinations involve custody issues, particularly where an affiliate is used to hold client assets.[17] While the SEC has stated that clients should not construe these requests as an indication that the SEC suspects wrongdoing by the adviser, some advisers and other industry participants are concerned that client relationships may be harmed if SEC examiners directly contact clients and have suggested that the SEC at least in the first instance seek to obtain confirmation from other types of third parties such as auditors.

K. In addition, in light of the criticisms described above, OCIE can be expected to step up its activity and to take a stricter position with respect to issues uncovered in inspections. In a recent speech, the Director of OCIE was quoted as saying that OCIE would take a "no excuses" approach to oversight.[18] She has stated that OCIE will be reviewing firms' compliance programs with the expectation that they will have "fully-operational, effective, compliant compliance programs," implying that OCIE may refer deficiencies in compliance programs to the enforcement staff, even in the absence of violations harming investors.[19] She also reportedly said that OCIE would expect "scrupulous compliance" with the letter of the securities laws and that the staff would be less tolerant of delays in providing documents in inspections and was developing standards for referring to enforcement cases where registrants appear to be delaying or otherwise frustrating an inspection.[20]

L. A valuable resource for obtaining information on current common deficiencies and examination findings is the CCOutreach Program, begun in 2005. Former Chairman Donaldson described the program as "an effort to communicate with CCOs, answer their questions, and give them the information and support they need from the Commission to perform their critical oversight function."[21] Through this program, the SEC holds regional seminars in the spring and summer and an annual national seminar in which CCOs share their concerns with the SEC, and SEC examiners share information with CCOs about compliance policies and procedures, the exam process, compliance deficiencies found by the staff, results of recent examination sweeps, and how deficiencies are identified.[22] As part of this program, the SEC staff also intends to hold “Focused Seminars” on particular topics of interest to CCOs, including issues facing CCOs of small advisory firms.[23] The SEC staff also is conducting regional seminars for SEC-registered investment advisers located overseas.[24] OCIE also publishes Compliance Alert on its public website, which highlights significant inspection findings, and operates an examination hotline.[25]

M. The coming year may see significant changes in the SEC's inspection program. OCIE as well as the SEC enforcement staff has been criticized for not uncovering the Bernard Madoff Ponzi scheme previously.[26] The SEC inspector general is conducting an investigation into the SEC's handling of the complaints received regarding the Madoff matter, in the course of which he plans to consider and possibly make recommendations with respect to broader issues relating to OCIE examination and inspection procedures.[27] In addition, a recent report by the US Chamber of Commerce recommended that OCIE be dissolved and its functions and personnel reincorporated into the regulatory policy divisions, as part of a sweeping reorganization of the SEC.[28] The Report advocates this change because it would enable the policy divisions to obtain more current information concerning the financial markets, which the currently structure, according to the report, does not.

III. Overview of the Inspection Process

A. Before the staff begins an inspection, they usually will establish a list of issues to be reviewed in the inspection. Routine inspections may include topics that are covered in all routine inspections, current "hot" topics, and issues that are unique to that registrant. Sources for the latter topics include the registrant's most recent public filings, results of past inspections, and other public and non-public sources of information concerning the registrant that may bear on the inspection. In particular, if the registrant was sent a deficiency letter as a result of a prior inspection, the staff is likely to flag those issues for the current inspection.

B. As noted above, before the staff arrives for a routine or sweep inspection, the staff will send a written notice to the registrant. The notice will identify documents that the staff wishes to review before the on-site inspection and documents that should be available for the staff's on-site review.

C. The staff is increasingly relying on computers to analyze data in connection with inspections. Accordingly, the written request specifies that certain information be provided in electronic format, and describes how it should be structured, including providing specific detailed formats.

D. The SEC's letter is usually a form letter, not tailored to the particular adviser to be inspected, and there is room for some negotiation at this stage. The SEC staff usually is willing to discuss whether certain requested documents do not need to be produced, because they are not relevant to the adviser's operations. Also, the SEC staff typically will discuss which items need to be produced at the start of the inspection and which may be supplied during the inspection.

E. At the commencement of the inspection, the SEC staff provides the registrant with a copy of Form 1661, which is entitled Supplemental Information Form for Regulated Entities Directed to Supply Information Other than Pursuant to a Commission Subpoena. The purpose of this notice primarily is to avoid any issues that might arise under the Privacy Act of 1974.[29] The SEC staff also provides a copy of Form 2389, which is entitled "Examination Information for Broker-Dealers, Transfer Agents, Clearing Agencies, Investment Advisers, and Investment Companies," which provides an overview of the inspection program.[30]

F. The SEC inspection staff uses a risk-based approach to determine the frequency of inspection and the depth of the procedures they apply to particular areas.[31] The SEC inspection staff believes that registrants with a strong "culture of compliance" are likely to have more effective compliance controls and less likely to have compliance problems than those that do not.[32]

G. Consequently, at the commencement of the inspection they will review the firm's internal controls and compliance procedures in the areas to be covered by the inspection and ask to interview personnel of the registrant. One purpose of these initial procedures is to begin the staff's assessment of the registrant's culture of compliance. The staff conducts less in depth inquiry in areas where the registrant has strong internal controls and procedures than in areas that the staff believes are weaker or deficient.

H. The initial review also will address the substantive effectiveness of the compliance program. This review, however, will not be limited to the documentation of the compliance program. The staff intends to look for evidence that the procedures are being implemented and effective. Therefore, in addition to the compliance manual and procedures, the staff can be expected to ask for documentation created in the course of implementing the compliance program, such as exception reports, compliance checklists, reconciliations, compliance work papers, documentation of problems and their resolution, and documentation of periodic review of the procedures.

I. The initial review can be expected to include an interview of the CCO.[33] The SEC staff views the CCO as valuable resource for the inspection program. As the head of OCIE has stated:

As regulators, we will look to the Chief Compliance Officer as our ally, just as we do the independent auditors and the Board of Directors, particularly the independent directors. As examiners, we will develop that alliance - we will speak often to the Chief Compliance Officer, utilizing her knowledge to more completely understand the fund's compliance program, to hear concerns, and to understand emerging issues and the ways in which they are being handled. We expect the Chief Compliance Officer to be open, honest and candid with us about issues that arise.[34]

Thus, the CCO should be assigned the leading role in handling an SEC inspection.

J. The SEC staff also can be expected to ask to review the CCO's annual written reports on the operation of the compliance program, which are required to be prepared under Rule 38a-1 for funds, and which are recommended, but not required, to be prepared by investment advisers Rule 206(4)-7.

K. Once the inspection begins, the inspection staff will stay until they have finished addressing the issues on their initial agenda and any additional issues that may have surfaced in the course of their stay. The staff will review records on site, perform certain analyses, and make copies of records that the staff wishes to take back to their offices. They may also ask to see additional records or interview members of the registrant's staff. Interviews have become a larger part of the inspection program, expanding from senior executives and senior traders to include marketing executives and sales and client service personnel.[35]

L. A log should be kept of all SEC staff requests and copies kept of all documents and information provided for review, separating indicating whether copies were sent or permitted to be taken off-site for review. In addition, it is recommended that all copies of documents provided to the SEC staff for off site review e Bate-stamped or otherwise marked for identification. It also would be prudent to request confidential treatment under the SEC's Freedom of Information Act ("FOIA") rules.[36]

M. At the conclusion of the on-site inspection, the staff usually conducts an exit interview. At this interview, the staff may review its preliminary findings with the registrant. In most instances, possible violations identified in the exit interview will appear in a deficiency letter, unless the registrant can persuade the inspection staff why the conduct in question is not a violation. The exit interview provides an opportunity for the registrant to present its views, including additional relevant documents and information. In addition, some registrants make a written submission to the staff responding to the staff's preliminary findings. This written submission should be provided to the staff promptly, so that the staff can consider it before preparing a deficiency letter.

N. After the staff leaves the premises, they will continue to review the information obtained at the on-site inspection and may request additional documents or information. Additional issues may surface as a result of the staff's review of this supplemental material.

O. The staff has adopted a policy of contacting registrants when an examination extends more than 120 days beyond the completion of the on-site visit. The purpose of the contact is to discuss the status of the inspection, the likely schedule for completion and the date of the exit interview.

P. Inspections can have three possible outcomes: a deficiency letter; an enforcement referral; and a letter of no findings.[37] A deficiency letter summarizes the staff's findings and can identify violations as well as control and compliance weaknesses. Registrants typically are given 30 days in which to correct or describe the steps intended to be taken to correct the deficiencies. An enforcement referral refers the matter to the SEC enforcement staff for further investigation and possible enforcement action. A letter of no findings means that the staff has closed the inspection without making any findings.

IV. Special Issues

A. Alteration or destruction of records

1. As a general matter, if in preparing for an SEC inspection a registrant discovers a deficiency in its compliance procedures or a compliance problem, the registrant should seek to correct it immediately, if possible. While in the case of a truly serious violation, remedial action at this stage may not avoid enforcement action entirely, it can be cited in mitigation and may reduce the severity of the sanction imposed.

2. However, corrections should be identified as such. Records created in connection with corrective action should clearly indicate when they were created and the action taken. Likewise, registrants should take steps to ensure that other records that have been requested in an inspection are not altered or destroyed. The SEC has sanctioned registrants for altering or destroying records requested in an inspection,[38] and for creating false and misleading records in response to an examination request.[39]

B. Privilege issues relating to the CCO and compliance records

1. It is clear that business entities can claim attorney-client privilege and work product protection.[40] Likewise, the CCO can obtain confidential legal advice and should be able to participate in a business entity's consultations with its counsel to obtain legal advice. However, the CCO's special status under Rule 38a-1 raises difficult questions.

2. The SEC has stated that the CCO's annual reports and the underlying compliance reports cannot be protected from disclosure to regulatory staff by privilege, under the doctrine that records required by rule to be kept are not privileged.[41] However, the staff also has stated that if the CCO reports into the legal department, "counsel will have to clearly articulate instances of client privilege and show great effort to segregate any dual responsibilities."[42] The staff has more recently stated that it will honor claims of attorney-client privilege, provided they are specific and not used as a stalling effort.[43]

3. As a result, inclusion of privileged matters in the CCO's annual report would waive privilege and make the information available not only to regulators, but to private litigants. The consequences of this waiver could be particularly severe in jurisdictions which follow the doctrine of subject matter waiver. This issue is the most recent stage of a longstanding dispute over the production of internal investigative reports.

4. All federal circuits but one that have addressed the issue have concluded that disclosure of such a report to a third party waives privilege as to everyone, not just the party to which it was provided.[44] A recent district court case in the Southern District of New York involving disclosure to the SEC of work product prepared for a company’s audit committee by its counsel reached a contrary result.[45] There, the court concluded that work product privilege had not been waived as to third parties because the government and the company’s audit committee shared a common interest in identifying and eliminating wrongdoing at the company. Also, the company, with the government’s cooperation, had taken steps to preserve the confidentiality of the disclosed information. While the case indicates that in appropriate circumstances a company may successfully limit the consequences of disclosing privileged information to the SEC, in light of the weight of the contrary precedent it is unclear whether other courts will follow its reasoning.

5. As a result, registrants should be careful to ensure that the CCO's reports do not include any legal advice that is intended to be kept confidential. It would also appear to be prudent that the investigation of potentially serious matters be handed over to legal counsel so that the confidentiality of the investigation and legal analysis of the potential violation can be maintained to the extent possible.

6. The CCO's role in connection with the "correction" of "material compliance matters," which include legal violations, may raise difficult issues with respect to maintaining work-product and attorney-client privilege. A full treatment of these issues is beyond the scope of this paper. However, as discussed above, the staff views the CCO as an ally and a resource in the inspection process. The staff expects full and open communication from the CCO concerning the matters that come within his or her purview. This expectation may conflict with a registrant's legitimate expectations of confidentiality as to legal advice and work product.

7. Privilege issues also may arise in other contexts, for example when legal advice was obtained in connection with a particular transaction being reviewed by the inspection staff or when audits or reviews were conducted at the direction of inside or outside counsel and are subject to attorney-client privilege.

8. There is no set way to deal with requests by the SEC staff for privileged documents or information. They are handled on a case-by-case basis by the SEC. In many cases, the SEC will be sensitive to the concerns of the advisory firm. However, in those cases where the SEC believes it has a real need to review a privileged document, it may persist in its request.

9. How to handle SEC staff requests for privileged information in an inspection may be complicated by considerations as to the potential impact on a subsequent enforcement investigation or proceeding. Both the Department of Justice and the SEC staff may give “cooperation credit” to registrants for disclosing privileged communications and providing work-product, which may result in the registrant receiving more lenient treatment in any subsequent enforcement proceeding or criminal action.

10. The SEC staff’s past practice with respect to granting cooperation credit for disclosure of privileged information, however, has been highly controversial. The Seaboard Report, which contains the SEC’s organizational prosecution and cooperation standards, does not list waiver of privilege as a factor to be considered when evaluating cooperation, but does state that "the desire to provide information to the Commission staff may cause companies to consider choosing not to assert the attorney-client privilege, the work product protection and other privileges, protections and exemptions with respect to the Commission."[46] In the past, while the SEC staff stated that it did not require waiver of attorney-client privilege and such waiver is not a prerequisite of obtaining cooperation credit in an investigation,[47] the SEC staff could give substantial cooperation credit to parties that waived attorney client privilege or provide work product as part of their cooperation.

11. The SEC's recently published Enforcement Manual indicates that the staff no longer will request waivers of privilege. It states that the staff "should not ask a party to waive the attorney-client privilege or work product privileges and is directed not to do so."[48] The Manual further states that the central concern in granting cooperation credit is "whether the party has disclosed all relevant facts within the party's knowledge that are responsive to the staff's information requests, and not whether a party has elected to assert or waive a privilege."[49] However, the Seaboard Report is still the SEC's official statement on cooperation credit.[50] Accordingly, how this new policy on privilege waivers will apply in practice is still an open question.

12. Where a registrant decides to provide privileged materials or information to the SEC, it should take steps to seek to preserve confidentiality as well as the ability to argue that the waiver does not extend to third parties. At a minimum, the registrant should request confidential treatment for the materials and information under the SEC’s FOIA rules,[51] ask the SEC staff to enter into a confidentiality agreement, and ask the SEC staff to return the materials (and destroy any copies) at the end of the inspection. The SEC staff is not required to honor the request, but they may return the privileged documents if they have no further need for them.

C. E-mail and electronic documents

1. Requests for electronic records also may raise special issues. The staff increasingly is requesting firms to produce extracts from a firm's electronic records. While the extracts may facilitate staff review, creating the extracts may burden the firm's IT resources. Special programming may be required to generate reports containing the requested information, particularly where the data requested is not reported in that format in the ordinary course of business. In addition, firms should carefully review the responses to ensure that the errors have not been introduced in the file in the extraction and transcription process and that the extract contains all of the responsive electronic information is provided.

2. Before producing the files, firms should review the information and seek to anticipate questions that it may raise for the staff. Firms should consider providing responses to the anticipated questions when the electronic files are provided, in order to prevent misunderstandings and defuse potential problems.

3. Where technical or resource issues may delay a response for electronic records, the staff should be informed of the problem and the estimated completion, so as that it will not appear that the firm is seeking to delay the examination. Likewise, where it is apparent from the outset that responding to an electronic request may take a long time or be burdensome, the firm should bring this problem to the staff's attention and possibly seek to limit the scope of the request, in order to speed the response.

4. Issues also may arise in the context of requests for e-mail. The SEC inspection program is increasingly focusing on e-mail. The rationale for this shift in part relates to the market timing and late trading investigations, and the discovery of evidence of those violations in e-mail of the individuals involved.[52] It has been reported that the SEC staff is requesting access to e-mails of senior executives in order to evaluate a firm's compliance culture, as well as e-mails relating to specific focus areas.[53] The staff has stated that it has stopped asking for e-mails to and from CCOs in order to allow them more room to do their job effectively.

5. Accordingly, a registrant's document retention policy should expressly address e-mail retention. It also would be advisable to create standards discouraging informal and unconsidered business e-mail, since they may be subject to subsequent regulatory review. In addition, registrants also should establish standards for labeling privileged e-mail communications, so as to reduce the need for privilege review of individual e-mails or the inadvertent production of privileged e-mails.

6. The 1940 Act and the Advisers Act, and rules thereunder, do not expressly address e-mail, and the SEC to date has not issue formal written guidance on this subject. The staff has stated, however, that at present 1940 Act registrants should retain any e-mail that would be required to retained if it were prepared on paper.[54] The staff also may seek confirmation that the registrant’s e-mail procedures are appropriate to seek to ensure that all e-mails required to be preserved are captured by the document retention procedures.

7. In practice, it may not be easy to determine whether particular e-mails fall into a category of documents that need to be retained. It may be advisable to negotiate a list of search terms to be used in locating responsive emails, in order to assure the staff that all responsive emails will be provided. Difficult questions also may arrive where insurance company employees have responsibilities that cover both variable products and traditional insurance products.

8. When e-mails are requested in an inspection, the staff expects to be provided with the requested e-mails promptly.[55] However, firms should review the e-mail and remove privileged e-mails before production, as production to the inspection staff will waive the privilege. If it is necessary to delay production of e-mail for privilege review, the staff should be informed of the reason for the delay. The staff frequently will agree to accept a rolling production, so that the emails are provided in batches as the screening is completed. Where e-mails are withheld on grounds of privilege, the inspection staff will request a privilege log identifying the documents and the grounds on which privilege was claimed.[56]

Dated: April 30, 2009

-----------------------

[1] SEC Office of Compliance Inspections and Examinations ("OCIE"), Examinations of Investment Companies and Investment Advisers (March 2004) (the "OCIE Report"), at 2.

[2] Lori A. Richards, Director, OCIE, The SEC Speaks in 2009 (PLI).

[3] SEC, 2008 Performance and Accountability Report ("2008 SEC PAR"), Table 2.8, at 31, available at .

[4] OCIE, Examinations by the SEC Office of Compliance Inspections and Examinations, February 2009, The SEC Speaks in 2009 ("OCIE Outline").

[5] Lori A. Richards, Testimony Concerning the Securities and Exchange Commission and issues Raised by the Bernard L. Madoff Investment Securities Matter, presented before the U.S. Senate Committee on Banking, Housing and Urban Affairs (Jan. 27, 2009), available at news/testimony/2009/ts112709lar.htm ("Richards 2009 Testimony").

[6] Id.

[7] OCIE Outline, supra note 4.

[8] SEC: 2006 Performance and Accountability Report, at 12, available at about/secpar2006.shtml.

[9] Richards 2009 Testimony, supra note 5.

[10] 2008 SEC PAR, supra note 3, at 13.

[11] United States GAO, SEC: Steps Being Taken to Make Examination Program More Risk-Based and Transparent (Aug. 2007).

[12] See § 204 of the Advisers Act; § 31(b) of the 1940 Act.

[13] OCIE Outline, supra note 4.

[14] Lori A. Richards, Director, OCIE, Speech by SEC Staff: Compliance through Crisis: Focus Areas for SEC Examiners and Compliance Professionals, presented at National Meeting of National Society of Compliance Professionals (Oct. 21, 2008), available at news/speech/2008/spch102108lar.htm; Lori A. Richards, Director, OCIE, Speech by SEC Staff: Compliance in Today's Environment: Step Up to the Challenge, presented at IA Compliance Best Practices Summit 2009 (March 12, 2009), available at news/speech/2009/spch031209lar.htm ("Richards 2009 Speech").

[15] Lori A. Richards, Director, OCIE, Remarks at the 2006 Securities Law Developments Conference Investment Company Institute (Dec. 5, 2006), available at ("Richards 2006 Speech"). Noted deficiencies included: no annual review was conducted; the review was conducted in a single day; the scope and methodology were insufficient to identify significant gaps in the compliance program; insufficient resources were devoted to the annual review; the review resulted in no findings at all; there were no reports or documents evidencing the review; and no recommendations were made.

[16] See Letter, dated March 9, 2009, from Gene A. Gohlke, Associate Director, OCIE, to Karen Barr, General Counsel, Investment Adviser Association, available at eweb/docs/Public/IAA3.9.2008.PDF.

[17] S. Joyce, SEC Weighing Contacting Investors to Ensure Proper Custodial Practices, Sec. Reg. & L. Rep. (BNA), Vol. 41, No. 14, Apr. 6, 2009, at 601.

[18] S. Lynch, SEC Examinations Director Vows to Get Tough on Securities Cos, Dow Jones Newswire (Feb. 7, 2009).

[19] Richards 2009 Speech, supra note 14.

[20] Id.

[21] William H. Donaldson, SEC Chairman, Remarks Before the Mutual Fund and Investment Management Conference (Mar. 14, 2005), available at .

[22] Lori A. Richards, Director, OCIE, SEC’s Compliance Examinations in the Protection of Investors, Remarks at the 9th Annual IA Compliance Best Practices Summit 2007, IA Week and the Investment Adviser Association (Mar. 23, 2007), available at . The website for the CCOutreach program is .

[23] Lori A. Richards, Director, OCIE, Speech: Welcome and Closing Remarks Before the CCOutreach National Seminar (Nov. 14, 2007), available at .

[24] Id.

[25] Compliance Alert is available on OCIE's public website: /iaicccoutreach.htm. The examination hotline telephone number is (202) 551-EXAM.

[26] S. Lynch, SEC Examinations Director Vows to Get Tough on Securities Cos, Dow Jones Newswire (Feb. 7, 2009).

[27] David H. Kotz, SEC Inspector General, Testimony Before the U.S. House of Representatives Committee on Financial Services (Jan. 5, 2009).

[28] U.S. Chamber of Commerce Center for Capital Markets Competitiveness, Examining the Efficiency and Effectiveness of the U.S. Securities and Exchange Commission (Feb. 2009) (conducted by Jonathan Katz, former Secretary of the SEC). An earlier report sponsored by the U.S. Chamber of Commerce also made this recommendation. See Commission on the Regulation of the U.S. Capital Markets in the 21st Century, Report and Recommendations (Mar. 2007) at 6.

[29] 5 U.S.C. § 552a.

[30] Copies of Forms 1661 and 2389 are available on OCIE's public website: about/offices/ocie.shtml.

[31] OCIE Report, supra note 1, at 16.

[32] Lori A. Richards, Director, OCIE, Speech: Working toward a Culture of Compliance: Some Obstacles in the Path, presented at National Society of Compliance Professionals 2007 National Membership Meeting (Oct 18, 2007), available at ; Lori A. Richards, Director, OCIE, Speech: The Process of Compliance, Remarks Before the National Membership Meeting of the National Society of Compliance Professionals (Oct. 19, 2006), available at ; Lori A. Richards, Director, OCIE, Speech by SEC Staff: The New Compliance Rule: An Opportunity for Change, presented at ICI/Independent Directors Council Mutual Funds Compliance Programs Conference § 2 (June 28, 2004), available at news/speech/spch0630041ar.htm (“Richards 2004 Speech”); Lori A. Richards, Director, OCIE, Speech: The Culture of Compliance, presented at NRS Spring Compliance Conference (Apr. 23, 2003), available at news/speech/spch042303lar.htm..

[33] See Richards 2004 Speech, supra note 32.

[34] Id.

[35] See S. Joyce, SEC Exam Practices Evolve with Markets as Regulatory Work Continues, Officials Say, Fed. Sec. & L. Rep. (BNA), Vol. 40, No. 24, June 16, 2008, at 937.

[36] 17 C.F.R. § 203.83. Irrespective of whether confidentiality is requested, records of SEC inspections of mutual funds and investment advisers are exempt from disclosure pursuant to a FOIA request under § 31(c) of the 1940 Act and § 210(b) of the Advisers Act, respectively.

[37] OCIE Report, supra note 1, at 15-16.

[38] See In re Amaroq Asset Management, LLC, 2008 WL 2744866 (July 14, 2008) (initial decision) (finding that adviser had refused to produce documents for SEC staff inspection and provided inconsistent explanations of the existence and location of the requested records and revoking the adviser's registration, barring the individual respondent from association with any investment adviser, with a right to reapply after one year, granting a cease and desist order, and imposing a $15,000 civil penalty on the individual respondent); In re Phlo Corp., Release No. ID-307, 2006 WL 372657 (Feb. 17, 2006) (transfer agent and one of its principals sanctioned for, among other things, delay in production and incomplete production of documents requested by the inspection staff); SEC v. Schield Management Company, Civil Action No. 03-B-1332 (D. Colo. Aug. 26, 2004), Lit. Rel. 18865 (Sept. 2, 2004) (investment adviser firm and its president consented to an injunction against failing to make and keep prescribed records or failing to make such records available for examination by SEC staff, where the adviser allegedly, at the direction of its president, "destroyed and altered documents it was required to produce during the course of a statutorily authorized Commission examination." The president also allegedly ordered the destruction of e-mails and the alteration of other records); see also In re Fidelity Brokerage Services, LLP, Admin. Pro. No. 3-11575, Exchange Act Rel. No. 50138 (Aug. 3, 2004) (sanctioning broker-dealer where, in preparation for internal audits, regional managers and branch managers caused records to be altered or destroyed so that it would appear that their offices were complying with internal firm policies and SEC and SRO requirements. Individual branch office managers and registered representatives also were sanctioned by the NYSE).

[39] See In re Keefe, Initial Decision Rel. No. 374 (April 3, 2009) (imposing 12-month suspension on mutual fund portfolio manager for creating and providing to compliance officer, in response to request prompted by SEC inspection, notes for non-existent investment committee meetings).

[40] See Upjohn Co. v. U.S., 449 U.S. 383 (1981); Hickman v. Taylor, 329 U.S. 495 (1947).

[41] Compliance Programs of Investment Companies and Investment Advisers, Releases Nos. IA-2204 and 26299, at note 94 (Dec. 17, 2003).

[42] Richards 2004 Speech, supra note 32.

[43] Attorney-client privilege can be asserted if not too broad, official says, BD WEEK, Dec. 1, 2008.

[44] See 6 Moore's Federal Practice § 26.49[5] (3d ed. 2004). Compare Diversified Industries, Inc. v. Meredith, 572 F.2d 596, 611 (8th Cir. 1978) (en banc) (disclosure of protected materials to SEC during a formal investigation did not waive privilege in subsequent civil litigation), with In re Steinhardt Partners, 9 F.3d 230, 235 (2d Cir. 1993) (voluntary submission of memorandum to SEC constituted a waiver of privilege as to third parties). Most recently, the Tenth Circuit joined the First, Second, Third, Fourth, Sixth, and DC Circuits in rejecting a "selective waiver" rule which would allow a company to voluntarily surrender documents to government agencies but still assert attorney-client privilege in subsequent legal actions.  In re Qwest Communications International Inc., 450 F.3d 1179 (10th Cir.), cert. denied, 127 S. Ct. 584 (2006). However, a recent district court case suggested that In re Steinhardt "counseled a case-by-case approach to selective waiver," but noted that "there is a strong presumption against a finding of selective waiver, and it should not be permitted absent special circumstances." In re Initial Public Offering Sec. Litig., No. 21 MC 92 (SAS), 2008 WL 40093 (S.D.N.Y. Feb. 14, 2008) at *6. In that case, the district court refused to allow selective waiver. Id., 2008 WL 40093, at *8.

[45] Cardinal Health, Inc. Securities Litigation, 2007 WL 495150 (S.D.N.Y. Jan. 26, 2007).

[46] Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934 and Commission Statement on the Relationship of Cooperation to Agency Enforcement Decisions, Securities Exchange Act Release No. 44969 (Oct. 23, 2001), available at: .

[47] Linda Chatman Thomson, Director, SEC Division of Enforcement, Remarks Before the 27th Annual Ray Garrett, Jr. Corporate and Securities Law Institute 2007 (May 4, 2007), available at: (“Thomson Speech”).

[48] SEC Division of Enforcement, Enforcement Manual (Oct. 6, 2008), at 99.

[49] Id., at 99-100.

[50] Id.

[51] 17 C.F.R. § 203.83.

[52] OCIE Report, supra n. 1, at 3.

[53] Alison Sahoo, SEC Getting Tough on E-Mail Retention, Ignites, Aug. 31, 2004; Gohlke on E-Mails, IM Insight, Aug. 16, 2004, at 1 ("Gohlke on E-Mails"); Alison Sahoo, SEC Scouring E-Mail to Check Firms' Compliance, Ignites, Jun. 7, 2004.

[54] Gohlke on E-Mails, supra note 53.

[55] Id.

[56] Id.

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