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Dodd-Frank

SEC Gets a Taste of Its Own Medicine While Preparing Report for Congress

by   |   January 6, 2011

Section 961 of the Dodd-Frank Act requires that the SEC provide the Senate Committee on Banking, Housing, and Urban Affairs, and the House Committee on Financial Services, a report on the “supervisory controls” over the conduct by the SEC of examinations of registered entities, enforcement investigations, and reviews of corporate financial securities filings.  The report is required to be provided not later than 90 days after the end of each fiscal year. The SEC has delivered the first such report for the fiscal year ending September 30, 2010.

Perhaps not surprisingly, the SEC concluded no significant deficiencies in internal supervisory controls were identified as of September 30, 2010.  Based on the results of the evaluation, the report also concluded the internal supervisory controls of the SEC with respect to examinations of the Office of Compliance and Inspections, or OCIE, enforcement investigations, and Corporation Finance filing reviews are effective, and the procedures of the SEC applicable to the OCIE, enforcement, and Corporation Finance staff who perform examinations of registered entities, enforcement investigations, and reviews of corporate financial securities filings, respectively, are effective.

We’ll see if the Comptroller General agrees when it reviews the adequacy of the SEC’s internal supervisory control structure and procedures once every three years, as required by the Dodd-Frank Act.  After all, the SEC left itself plenty of wiggle room.  For instance, the report states “there may be instances where judgments made in good faith are, in hindsight, deemed inappropriate.”  A reference to the Madoff investigations perhaps?

The report describes some of the procedures used.   For instance, the OCIE assessment team identified the key parties responsible for execution of the controls and created a “process flow narrative” that is, a step-by-step description of how the controls apply to the examination and investigative processes.  There will probably not be a lot of sympathy from corporate America that has been grappling with the costs of Sarbanes-Oxley Section 404 compliance for the last several years.

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