2016 Report and Certification of Internal Supervisory Controls 

Introduction 

Section 961 of Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Act") 

requires that not later than 90 days after the end of each fiscal year, the Securities and Exchange 

Commission ("SEC" or "Commission") shall report to the Senate Committee on Banking, 

Housing, and Urban Affairs and the House Committee on Financial Services on the supervisory 

controls over the conduct by the Commission of examinations of registered entities, 

enforcement investigations, and review of corporate financial securities filings. 1 This report is 

being submitted for the Commission's fiscal year ending September 30, 2016. 

Background 

The SEC's mission is to protect investors; maintain fair, orderly, and efficient markets; and 

facilitate capital formation. Although the SEC's functional responsibilities are organized among 

five divisions and 23 offices, the scope of the activities covered in Section 961 fall principally 

under the purview of: the Office of Compliance Inspections and Examinations ("OCIE"), the 

Office of Credit Ratings ("OCR"), the Division of Enforcement ("Enforcement"), and the 

Division of Corporation Finance ("Corporation Finance"). 2 Therefore, in the context of this 

report, references to "the Commission's internal supervisory controls" or "internal supervisory 

controls of the Commission" relate to the relevant internal supervisory controls of OCIE, OCR, 

Enforcement, and Corporation Finance. 

OCIE principally administers the examination program for SEC-registered entities including, 

among others, self-regulatory organizations, broker-dealers, transfer agents, clearing agencies, 

municipal advisors, investment companies, and investment advisers. The office conducts 

examinations to foster compliance with the securities laws, to detect violations of the law, to 

identify risks, and to inform policy. OCR is responsible for conducting examinations and 

1 References to "examinations" within this report refer to both examinations and inspections conducted by either the 

Office of Compliance Inspections and Examinations or the Office of Credit Ratings. 

2 The Act also mandated the creation of OCR, which was established in June 2012 upon the hiring of its Director 

and was immediately staffed with a reassigned examination team from OCIE and a reassigned monitoring team 

from the Division of Trading and Markets. The certification mandated by Section 961 of the Act is required for the 

"Director of the Division of Enforcement, the Director of the Division of Corporation Finance, and the Director of 

the Office of Compliance Inspections and Examinations (or the head of any successor division or office)." The SEC 

has determined that OCR should be considered a successor of OCIE and therefore subject to the reporting 

certification of Section 961. 

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monitoring the activities of Nationally Recognized Statistical Rating Organizations to assess and 

promote compliance with statutory and Commission requirements. Enforcement is principally 

responsible for assisting the Commission in executing its law enforcement function by, among 

other things, conducting investigations of potential securities law violations; recommending, in 

appropriate circumstances, that the Commission institute civil actions in federal court or before 

an administrative law judge; and prosecuting cases on behalf of the Commission. Finally, 

Corporation Finance is principally responsible for selectively reviewing the disclosure 

documents that relate to the offer and sale of securities in registered transactions and which 

publicly-held companies file with the Commission. Through Corporation Finance's review 

process, the division provides comments on where it believes companie~ can improve or enhance 

their compliance with the disclosure requirements of the federal securities laws. 

Staffing within OCIE and Enforcement consists of attorneys, accountants, examiners, subject 

matter experts, and other employees located both in the Washington, D.C. office and in 11 

regional offices located throughout the country. OCR' s staff is comprised of similarly diverse 

professionals who are divided between Washington, D.C. and the New York Regional Office. 

The majority of the SEC' s other offices and divisions, including Corporation Finance, are 

located exclusively in Washington, D.C. 

This report describes the scope and methodology used to evaluate the internal supervisory 

controls and relevant procedures applicable to the OCIE, OCR, Enforcement, and Corporation 

Finance staff that perform examinations of registered entities, enforcement investigations, and 

reviews of corporate financial securities filings. Furthermore, the report describes whether any 

significant deficiencies in these controls or procedures have been identified to exist as of the end 

of the fiscal year. The report also includes a description of the inherent limitations of procedures 

applicable to staff, internal supervisory controls, and the evaluation process. Finally, the report 

includes an assessment of control and procedure effectiveness, the Certification of Supervisory 

Controls that is required by the Act, and the status of the Comptroller General's review pursuant 

to Section 961 ( e) of the Act. 

Internal Supervisory Controls and Procedures Applicable to Staff 

Section 961 (b )( 1) of the Act requires the assessment of both the internal supervisory controls and 

Commission procedures applicable to the Commission staff who perform examinations of 

registered entities (i.e., OCIE and OCR), enforcement investigations (i.e., Enforcement), and 

reviews of corporate financial securities filings (i.e., Corporation Finance). The terms "internal 

supervisory controls" and "procedures applicable to staff" are not defined in the Act. For 

purposes of this report and the attached certification, "procedures applicable to staff'' refer to the 

established "day-to-day" procedures to be followed by the employees charged with these 

functions. "Internal supervisory controls" refer to the processes established by management of 

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each respective office or division for monitoring that the "procedures applicable to staff' are 

performed consistently with professional competence and integrity, and also remain reasonable, 

adequate, and current. 

Scope and Methodology 

1. Overview 

The Directors of OCIE, OCR, Enforcement, and Corporation Finance, each with the assistance 

of his or her supervisory staff and other office or division personnel, evaluated the effectiveness 

of internal supervisory controls and relevant procedures applicable to staff. The internal 

supervisory control review encompassed internal controls in place during the entire fiscal year 

and the assurance of those controls encompassed the 90-day period ending on the final day of 

the fiscal year ending on September 30, 2016. Upon completion of the evaluation, each Director 

signed a certification concerning the adequacy of the Commission's internal supervisory controls 

with respect to his office or division. 

To facilitate an effective, efficient, and consistent approach to the evaluations, the agency 

established a working group consisting of Senior Officers and staff from OCIE, OCR, 

Enforcement, Corporation Finance, and the Office of the Chief Operating Officer. Additionally, 

the working group, as needed, obtained input from other divisions or offices within the agency. 

The working group met and communicated regularly to discuss the development and 

implementation of the project plans that were prepared by each of the relevant offices and 

divisions and to ensure a consistent methodology for conducting the Section 961 assessment 

corresponding with relevant government-wide internal controls standards and guidance. 

OCIE, OCR, Enforcement, and Corporation Finance engaged in a "top-down, risk-based" 

consideration of their functional responsibilities, focusing on assessing whether their respective 

objective of conducting examinations, investigations, or reviews of corporate financial securities 

filings with professional competence and integrity had been consistently met during the 90-day 

period subject to evaluation. This approach involved identifying risks to achieving such 

objectives, determining whether controls exist to address those risks, and evaluating the 

operating effectiveness of the controls included in the evaluation. The procedures for collecting 

information to evaluate the effectiveness of internal supervisory controls consisted principally of 

interviews, observation, process walkthroughs, inspection of documents, self-assessments 

(including the use of sub-certifications), and through the application of judgment, as appropriate. 

In addition, relevant members of the working group reviewed and considered background 

material that included the review of the internal supervisory controls pursuant to the 

requirements of Section 961 of the Act, the Federal Managers' Financial Integrity Act (FMFIA) 

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assurance statements for fiscal year 2016, results of an agency-wide review of entity-level 

controls, and recent Office of Inspector General and Government Accountability Office 

("GAO") findings. 

Finally, the offices and divisions reviewed any deficiencies identified by assessing their impact 

on the evaluation of the design and operating effectiveness of internal supervisory controls, 

including making the determination of whether any such deficiencies were considered 

significant, either individually or in the aggregate. OCIE, OCR, Enforcement, and Corporation 

Finance provided summary information for such determination and for the evaluation as a whole 

to the respective office or division director in order to support the relevant assertions within the 

certification. 

2. Examinations and Investigations 

To assess the effectiveness of internal supervisory controls over examinations and investigations 

and the procedures applicable to the staff performing such functions, OCIE, OCR, and 

Enforcement utilized assessment staff that included members of the working group, senior 

managers, and other staff with experience in conducting examinations or investigations, as 

applicable. The assessment staff for each function identified and evaluated the risks and related 

key controls that are important to the function's ability to consistently conduct examinations or 

investigations with professional competence and integrity. The evaluation included the 

identification of any deficiencies in control design or operating effectiveness. 

In the case of OCIE and Enforcement, the evaluation also included an identification of the 

information technology ("IT") systems used to track examinations and investigations and an 

assessment of how the IT systems are used to support key supervisory controls and the 

procedures applicable to staff. In the case of OCR, the assessment staff reviews and tests 

supervisory controls within its examination system. 

The assessment staff for examinations and investigations conducted structured interviews with 

Home and Regional Office Senior Officers3 and other staff with the goal of obtaining their 

assistance and support in the identification and description of controls. In order to assess the 

effectiveness of supervisory controls, the teams designed tests around the key internal 

supervisory controls that were determined to be designed appropriately. The staff used a 

combination of statistical, random, and judgmental sampling techniques to select samples for 

validating operational effectiveness, as applicable. The staff obtained and documented evidence 

to support the effective operation of key supervisory controls. 

3 The Regional Office Directors and Home Office Senior Officers within OCIE and Enforcement have supervisory responsibility 

for staff in their respective offices; accordingly, evaluations of internal supervisory controls over examinations and investigations 

required the coordinated participation of the Home and Regional Offices. 

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This process was closely coordinated with the annual Management Assurance statement process 

performed for FMFIA purposes and used the sub-certification prepared for the FMFIA assurance 

statement, due to the concurrent nature of the identified risks, controls and gaps. The 

sub-certifications were provided to the Directors of OCIE and Enforcement, along with key 

background materials, to support the assertions in the certification required by Section 961 ( c )(2) 

of the Act. 

3. Reviews of Corporate Financial Securities Filings 

To assess the effectiveness of internal supervisory controls over reviews of corporate financial 

securities filings and the procedures applicable to the staff conducting those reviews, 

Corporation Finance identified and evaluated risks and related key controls that are important to 

the division's ability to consistently conduct reviews with professional competence and integrity, 

which included the identification of any deficiencies in control design or operating effectiveness. 

In order to assess the effectiveness of supervisory controls, the division designed and 

executed tests of key internal supervisory controls during an interim period and the year-end 

that included a combination of random and judgmental sampling techniques to select 

samples for validating operational effectiveness. The division obtained and documented 

evidence to support the effective operation of key supervisory controls. 

This process built upon the annual Management Assurance statement process performed for 

FMFIA purposes. 

Inherent Limitations 

All control systems, including internal supervisory controls, are subject to inherent limitations. 

No matter how well-conceived and operated, an internal control system cannot provide absolute 

assurance regarding the achievement of objectives, nor can an evaluation of an internal control 

system provide absolute assurance that significant deficiencies will be identified. Also, 

projections of any evaluation of effectiveness to future periods are subject to the risk that 

internal supervisory controls may become inadequate because of changes in conditions, or that 

the degree of compliance with the policies or procedures may deteriorate. 

Because of the nature, including breadth, of the Commission's examination, investigation, and 

review of corporate financial securities filings functions, as well as limitations on resources, 

management and staff within the relevant offices and divisions must exercise judgment in 

conducting examinations of registered entities, enforcement investigations, and reviews of 

corporate financial securities filings. As such, controls are inherently designed to allow for the 

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application of judgment in decision-making. There may be instances where judgments made in 

good faith are in hindsight deemed inappropriate. 

The evaluations of internal supervisory controls and procedures applicable to staff covered by 

this report for the Commission's fiscal year ending September 30, 2016 represent the seventh 

time such evaluations have been conducted pursuant to the requirements of Section 961 of the 

Act. The SEC will continue to enhance the approach taken in 2016 to improve the 

effectiveness and efficiency of the efforts going forward. The results of GAO's review under 

Section 96l(e) of the Act may also result in adjustments to the process in future years. 

Despite the limitations described above, it is our beliefthat the evaluations of the Commission's 

internal supervisory controls and procedures applicable to staff provide a reasonable and 

justifiable basis for the conclusions expressed in this report. 

Significant Deficiencies 

Section 961 ( c )(2)(D) requires each respective Director of OCIE, Enforcement, and Corporation 

Finance and any successor offices, such as OCR, to certify that he or she has disclosed to the 

Commission any significant deficiencies in the design or operation of internal supervisory 

controls that could adversely affect the ability of the applicable Division or Office to consistently 

conduct inspections, or investigations, or reviews of corporate financial securities filings with 

professional compet~nce and integrity. Under the terms of Reorganization Plan No. 10 of 1950, 

the executive and administrative functions of the Commission are transferred to the Chairman of 

the Commission, including, among other functions, the appointment and supervision of 

personnel employed under the Commission.4 Accordingly, the Director of each respective 

Division or Office should make any required disclosures to the Chairman of the Commission. To 

make this clear, the attached certification states that the respective Directors have "disclosed to 

the Chairman of the Commission any significant deficiencies in the design or operation of 

internal supervisory controls .... " A copy of this report is also being provided to each 

Commissioner. 

As part of the evaluations described above, the respective OCIE, OCR, Enforcement, and 

Corporation Finance assessment teams evaluated their findings to determine whether any 

deficiencies existed as of September 30, 2016. The severity of all deficiencies identified was 

evaluated to determine whether any, either individually or in the aggregate, constituted a 

significant deficiency. Upon completion of this process, no significant deficiencies in internal 

supervisory controls were identified. 

For purposes of making the determinations described above, a "significant deficiency" meriting 

4 15 F.R. 3175, 64 Stat. 1265, Section l(a). 

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the attention by the Chairman of the Commission, is any deficiency, or combination of 

deficiencies, in internal supervisory controls that inhibits the respective Office or Division from 

achieving the overall goals established by senior management for consistently conducting 

examinations, investigations, or reviews of corporate financial securities filings with professional 

competence and integrity. 

Summary of Assessment Results 

Based on the results of the evaluations described above, as of September 30, 2016, the internal 

supervisory controls of the Commission with respect to OCIE and OCR examinations, 

Enforcement investigations, and Corporation Finance reviews of corporate financial securities 

filings are effective, and the procedures of the Commission applicable to the OCIE, OCR, 

Enforcement, and Corporation Finance staff who perform examinations of registered entities, 

enforcement investigations, and reviews of corporate financial securities filings, respectively, are 

effective. 

Certification of Internal Supervisory Controls 

See Exhibit A - Section 961 ( c )(2) Certification 

Summary of Review by the GAO 

Section 961(e) of the Act requires a review by the Comptroller General of the United States of 

the adequacy and effectiveness of the Commission's internal supervisory control structure and 

procedures not less frequently than once every three years. Section 96l(b)(3) oftheAct requires 

this report to contain a summary of the GAO's review. 

The GAO initiated its triannual review under Section 961(e) in July 2015 and released its report 

in October 2016, "Management Has Enhanced Supervisory Controls and Could Further Improve 

Efficiency" (GA0-17-16). The report concluded that the agency's overall internal control 

framework reflected key components of internal controls, and that appropriate steps had been 

taken by the agency to enhance the framework since GAO' s initial assessment in 2013. The 

report also stated that the agency had implemented GAO's 2013 recommendation that it should 

make certain that existing and future supervisory controls have clearly defined activities and 

readily available documentation, and recommended that additional measures could be taken to 

formalize the Commission's 961 Working Group or otherwise establish a formal body to 

leverage the divisions' and offices' experiences, expand their collaboration to share best 

practices and streamline procedures and documentation. The SEC is working to implement all of 

GAO's recommendations, and looks forward to GAO's review in 2019. 

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Exhibit A 

SECTION 96l(c)(2) CERTIFICATION 

PurstjBlltto the requirements of Section 96l(c)(2) of the Dodd-Frank Wall Street Refonn and Conswner 

Protection Act, I hereby certify that: 

1. I am directly responsible for establishing and maintaining the internal supervisory controls of the 

Division or Office of which 1 am the head. 

2 I am lmowledgeable about the internal supervisory controls of the Division or Office of which I am the 

head. 

3. I have evaluated the effectiveness during the 90-day period ending on the final day of the fiscal year 

ended September 30, 2016 of the internal supervisory controls of the Division or Office of which I am 

the head. 

4. I have disclosed to the Chairman of the Commismon any significant deficiencies in the design or 

operation of internal supervisory controls identified as a result of the evaluation described above that 

could adversely affect the ability to consistently conduct with professional competence and integrity, 

respectively: 

(a) inspections and examinations by the Office of Compliance Inspections and Examinations and 

its successor office, the Office of Credit Ratings, 

(b) investigations by the Division of Enforcement, or 

(c) reviews of corporate financial securities filings by the Division of Corporation Finance. 

This certification concerning the adequacy of the Commission's internal supervisory controls is based on 

the review described in the accompanying report of the internal supervisory controls and procedures 

applicable to the staff that perfonns the duties described above within the Division or Office of which I 

am the head and is accurate to the best of my knowledge and belief. This review was performed with the 

assistance of my supervisory staff and other personnel within my Division or Office. 

With Respect to Inspections and Examinations: 

Name: Marc Wyatt Jiu_} 

Date: I 2/ 12../ /(., 

Title: Director 

Office of Compliance Inspections and Examinations 

Name: Thomas J. Butte?' ~C::= __ .---_~, 

Date: I μf 1 '-4 114' 

Title: Director 

Office of Credit Ratings 

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With Re7 0 ~views of ~:.:inancial Securities Filings: 

am ~1a ~ / 

Date: !t:L/ 3/;0 

Title: Director 

Division of Corporation Finance 

Division of Enforcement 

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