U.S. SECURITIES AND EXCHANGE COMMISSION OFFICE OF INSPECTOR GENERAL

i 

Office of Compliance Inspections and 

Examinations’ Management of Investment 

Adviser Examination Coverage Goals 

March 10, 2016 

 Report No. 533
 UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 OFFICE OF

INSPECTOR GENERAL

M E M O R A N D U M

March 10, 2016

TO: Marc Wyatt, Director, Office of Compliance Inspections and Examinations

FROM: Carl W. Hoecker, Inspector General

SUBJECT: Office of Compliance Inspections and Examinations’ Management of Investment 

Adviser Examination Coverage Goals, Report No. 533

Attached is the Office of Inspector General’s (OIG) final report detailing the results of our 

evaluation of the Office of Compliance Inspections and Examinations’ (OCIE) management of 

investment adviser examination coverage goals. The report contains two recommendations 

for corrective action that, if fully implemented, should help OCIE progress toward meeting 

strategic objectives and long-term investment adviser examination coverage goals. 

On February 16, 2016, we provided management with a draft of our report for review and 

comment. In its March 4, 2016, response, management concurred with our recommendations. 

We have included management’s response as Appendix II in the final report.

Within the next 45 days, please provide the OIG with a written corrective action plan that 

addresses the recommendations. The corrective action plan should include information such 

as the responsible official/point of contact, timeframe for completing required actions, and 

milestones identifying how your office will address the recommendations.

We appreciate the courtesies and cooperation extended to us during the evaluation. If you 

have questions, please contact me or Rebecca L. Sharek, Deputy Inspector General for 

Audits, Evaluations, and Special Projects. 

Attachment

cc: Mary Jo White, Chair 

Andrew Donohue, Chief of Staff, Office of the Chair

Michael Liftik, Deputy Chief of Staff, Office of the Chair

Nathaniel Stankard, Deputy Chief of Staff, Office of the Chair

Michael S. Piwowar, Commissioner

Jaime Klima, Counsel, Office of Commissioner Piwowar 

Kara M. Stein, Commissioner

Robert Peak, Advisor to the Commissioner, Office of Commissioner Stein

Anne K. Small, General Counsel 

Timothy Henseler, Director, Office of Legislative and Intergovernmental Affairs

John J. Nester, Director, Office of Public Affairs
Mr. Wyatt

March 10, 2016

Page 2 

Kenneth Johnson, Chief Financial Officer, Office of Financial Management

Jane Jarcho, Deputy Director, Office of Compliance Inspections and Examinations

Peter Driscoll, Chief Risk and Strategy Officer, Office of Risk and Strategy, Office of 

Compliance Inspections and Examinations

Jennifer McCarthy, Assistant Director, Office of Examination Support - Legal, Office of 

Compliance Inspections and Examinations

Darlene L. Pryor, Management and Program Analyst, Office of the Chief Operating 

Officer
U.S. SECURITIES AND EXCHANGE COMMISSION OFFICE OF INSPECTOR GENERAL

i

Why We Did This Evaluation

The U.S. Securities and Exchange 

Commission’s (SEC or agency) 

Office of Compliance Inspections 

and Examinations (OCIE) 

coordinates the national 

examination program for more than 

27,000 market participants over 

which the SEC has regulatory 

authority. OCIE’s largest program 

area is the Office of Investment 

Adviser/Investment Company 

(IA/IC) Examinations. In April 2014, 

the SEC Chair stated in 

Congressional testimony that the 

SEC was “...in a position to only 

examine 9% of registered 

investment advisers in fiscal year 

2013...More coverage is plainly 

needed...” We initiated this 

evaluation to assess OCIE’s 

efficiency and effectiveness in 

managing its human resources to 

meet its long-term goals, particularly 

for IA examinations. 

What We Recommended

We recommended that OCIE 

provide us the results of its 

consultant’s efficiency study when 

the study is complete. We also 

recommended that OCIE consider 

the results of the efficiency study 

and the recommendations of its 

Risk and Exam Process Steering 

Committee to improve its planning 

and staffing processes. Finally, we 

recommended that OCIE consider 

fully implementing GAO’s riskmanagement framework. 

Management concurred with the 

recommendations, which will be 

closed upon completion and 

verification of corrective actions.

What We Found

OCIE’s risk-based examinations of registered entities, including 

IAs, is central to the SEC’s strategic goal of fostering compliance 

with Federal securities laws. The Government Accountability 

Office (GAO) has established Standards for Internal Control in

the Federal Government for ensuring that Federal agencies, 

including the SEC, achieve stated objectives and allocate 

resources efficiently and effectively to meet those objectives. 

Additionally, GAO has established a risk-management 

framework to help managers make decisions about allocating 

finite resources and take action under conditions of uncertainty. 

We found that OCIE has worked to increase its examination 

coverage of IAs, including creating an Office of Risk Analysis 

and Surveillance and enhancing its use of advanced quantitative 

techniques, and continues to seek new ways to increase its 

efficiency. In fact, the almost 2,000 formal examinations OCIE 

conducted in fiscal year 2015 was an increase over each of the 

previous four fiscal years. However, improvements are needed 

to assess OCIE’s progress toward meeting strategic objectives 

and long-term IA examination coverage goals. Specifically, we 

found that: 

(1) OCIE’s performance measure – percentage of IAs 

examined each year – may not provide meaningful 

information due to variations in exam types, examination 

candidates, and regional office processes; and 

(2) the IA/IC program may benefit from adopting the GAO 

risk-management framework. 

OCIE’s management of IA examination goals and performance 

metrics can be more consistent with Federal internal control and 

risk management standards. Doing so will help ensure that 

examinations conducted support OCIE’s examination priorities, 

as well as OCIE’s long-term goal and the SEC’s strategic plan. 

In addition, management should ensure that OCIE’s 

performance metrics allow management to assess performance 

and ensure efficient and effective use of OCIE’s limited 

resources across regional offices. 

In September 2015, OCIE hired a consultant to help identify 

ways it can more efficiently use its resources. Management 

expects the consultant will report its findings and 

recommendations, if any, by September 2016.

Executive Summary OCIE’s Management of Investment Adviser 

Examination Coverage Goals

Report No. 533

March 10, 2016

For additional information, contact the Office of Inspector General at 

(202) 551-6061 or http://www.sec.gov/about/offices/inspector_general.shtml.
U.S. SECURITIES AND EXCHANGE COMMISSION OFFICE OF INSPECTOR GENERAL

REPORT NO. 533 ii MARCH 10, 2016 

TABLE OF CONTENTS 

Executive Summary ..................................................................................................... i 

Background and Objectives....................................................................................... 1 

Background ................................................................................................................. 1 

Objectives .................................................................................................................... 7 

Results ........................................................................................................................ 9 

Improvements Are Needed in OCIE’s Management of the IA/IC Program .................... 9 

Recommendations, Management’s Response, and Evaluation of Management’s 

Response ............................................................................................................ 17 

Other Matters of Interest .......................................................................................... 18

Figures, Tables, and Charts 

Table 1. Summary of OCIE Programs, Number of Employees, and FY 2015 

Examinations .......................................................................................................... 2 

Table 2. Registered IAs, Assets Under Management, and Examinations 

 Conducted ............................................................................................................ 12 

Table 3. Average Number of IA/IC Examinations-per-Examiner for FY 2013, 

FY 2014, and FY 2015 .......................................................................................... 14 

Table 4. GAO Risk-Management Framework ............................................................ 15 

Appendices 

Appendix I. Scope and Methodology .........................................................................19

Appendix II. Management Comments ........................................................................ 23 

ABBREVIATIONS 

Dodd-Frank Dodd-Frank Wall Street Reform and Consumer Protection Act 

FINRA Financial Industry Regulatory Authority 

FY fiscal year 

GAO Government Accountability Office 

GPRAMA GPRA Modernization Act of 2010 

IA investment adviser

IC investment company 

NEP National Examination Program 

OCIE Office of Compliance Inspections and Examinations 

OFM Office of Financial Management 

OIG Office of Inspector General 

OMB Office of Management and Budget 

ORAS Office of Risk Analysis and Surveillance 

SEC or agency U.S. Securities and Exchange Commission 

TCR tips, complaints, and referrals 
U.S. SECURITIES AND EXCHANGE COMMISSION OFFICE OF INSPECTOR GENERAL

REPORT NO. 533 1 MARCH 10, 2016 

Background and Objectives 

Background 

The U.S. Securities and Exchange Commission’s (SEC or agency) Office of 

Compliance Inspections and Examinations (OCIE) plays a critical role in protecting 

investors. OCIE administers the SEC’s National Examination Program (NEP) and 

conducts examinations and oversight of the nation’s approximately 27,000 registered 

entities (registrants). These include about 11,900 investment advisers (IAs), about 

10,500 mutual funds and exchange-traded funds, nearly 4,300 broker-dealers, 

425 transfer agents, 18 securities exchanges, and self-regulatory organizations such as 

the Financial Industry Regulatory Authority (FINRA). OCIE examinations of these 

entities improve industry compliance with Federal securities laws, detect and prevent 

fraud, inform policy, and identify risks.

OCIE is composed of various program areas and operational and administrative 

offices.1

 The four main program areas are: (1) Office of Investment Adviser/ 

Investment Company (IA/IC) Examinations; (2) Office of Broker-Dealer Examinations; 

(3) Office of Clearance and Settlement; and (4) Office of Market Oversight. Additionally, 

OCIE has a Technology Controls Program responsible for technology control program 

inspections of registered entities, including clearing agencies and exchanges. Each 

program area is headed by an Associate Director responsible for setting directives and 

ensuring consistency across the NEP with respect to the Associate Director’s program.2

 

As of October 2015, OCIE had over 900 total staff employed at the SEC’s Headquarters 

and its 11 regional offices. As Table 1 shows, in fiscal year (FY) 2015, OCIE conducted 

almost 2,000 formal examinations of registrants. More than 51 percent of OCIE’s FY 

2015 examination resources (467 examiners) were allocated to the IA/IC program, 

accounting for about 69 percent (or 1,358) of the exams conducted. 

 

1 OCIE’s operational and administrative offices include the offices of the Director, Managing Executive, 

and Chief Counsel. 

2

 OCIE is led by a Director, who is responsible for overseeing and managing the performance of the NEP, 

including its strategy, structure, people, processes, and technology. The Director introduces new 

program initiatives and identifies opportunities to enhance and improve the NEP. The Associate Directors 

report to the Director. 
U.S. SECURITIES AND EXCHANGE COMMISSION OFFICE OF INSPECTOR GENERAL

REPORT NO. 533 2 MARCH 10, 2016 

Table 1. Summary of OCIE Programs, Number of Employees, and 

FY 2015 Examinations 

Office of IA/IC 

Examinations

Office of 

Broker-Dealer 

Examinations

Office of Clearance 

and Settlement

Office of Market 

Oversight

 11,900 IAs

 10,500 mutual funds 

and exchange-traded 

funds

 $66 trillion in assets 

under management

 4,300 broker-dealers

 160,000 branch 

offices

 1,000 municipal 

advisors

 New responsibilities 

pending for certain 

derivatives markets 

and crowd funding 

portals

 8 active clearing 

agencies, of which 4 are 

designated as 

systemically important

 425 transfer agents

 New responsibilities 

pending for securitybased swap data 

repositories

 18 national securities 

exchanges

 FINRA, PCAOB, 

MSRB, FASB, and 

SIPC

 New responsibilities 

pending for securitybased swap execution 

facilities

Staff and Examinations within These Program Areas

Staff Exams Staff Exams Staff Exams Staff Exams

TOTAL 467 1,358 TOTAL 287 534 TOTAL 21 60 TOTAL 33 23

Total Number of Program Staff: 808 Total Number of Exams Conducted: 1,975

Source: Office of Inspector General (OIG)-generated based on information provided by OCIE and obtained from 

OCIE’s Exam Metrics and Activities tool. 

To determine the most appropriate candidates for examination, OCIE staff considers 

sources of risk information in conjunction with both the NEP’s annual examination 

priorities and regional office knowledge of registered entities. According to the NEP’s 

National Examination Program Manual (NEP Manual), dated March 30, 2015, the risk 

assessment process includes the review and consideration of, among other things: 

 objective risk-related information; 

 examination program insights; 

 risks identified by other SEC divisions and offices; 

 tips, complaints, and referrals (TCRs); and 

 other sources that may raise significant investor or financial risk. 

During inspections and examinations, OCIE examiners visit the offices of regulated 

entities, interview management, review documents, and analyze the entity's compliance 

programs and certain operations. When examiners determine that a regulated entity 

has not complied with securities laws, in most cases, the examiners issue a deficiency 

letter requiring the registrant to correct the deficiencies. If the deficiencies are serious, 

examiners may refer the matter to the SEC’s Division of Enforcement to determine 

whether an investigation and possible enforcement action are appropriate. 
U.S. SECURITIES AND EXCHANGE COMMISSION OFFICE OF INSPECTOR GENERAL

REPORT NO. 533 3 MARCH 10, 2016 

Requirements for Strategic Planning and Resource Allocation. The GPRA 

Modernization Act of 20103

 (GPRAMA) and Government-wide guidance such as Office 

of Management and Budget (OMB) Circular A-11, Preparation, Submission, and 

Execution of the Budget, provide requirements and strategies for Federal agencies to 

establish goals and objectives and align and manage resources to meet those goals 

and objectives. GPRAMA helps Federal agencies focus on their highest priorities and 

create a culture where data and empirical evidence play a greater role in policy, budget, 

management decisions, and agency performance assessments. GPRAMA requires 

agencies to make public a strategic plan that contains, among other things: 

1. a comprehensive mission statement covering the agency’s major functions and 

operations; 

2. general goals and objectives, including outcome-oriented goals, for the major 

functions and operations of the agency; and 

3. a description of how the goals and objectives are to be achieved, including a 

description of the processes, skills and technology, and resources required to 

achieve those goals and objectives. 

Moreover, OMB Memorandum M 10-244 states that: 

An agency’s strategic plan is a valuable tool for communicating to agency 

managers, employees, delivery partners, suppliers, Congress, and the 

public a common vision for the future. It should inform agency decisionmaking about the need for major new acquisitions, updated information 

technologies, hiring, skill development, and evaluations. . . . Above all, an 

agency’s strategic plan should be used to align resources and guide 

decision-making to accomplish priorities and improve outcomes. 

GPRAMA states that the strategic plan “shall cover a period of not less than 4 years 

following the fiscal year in which the plan is submitted.” As needed, the head of the 

agency may make adjustments to the strategic plan to reflect significant changes in the 

environment in which the agency is operating, with appropriate notification of Congress. 

In accordance with GPRAMA, the SEC developed a strategic plan for FY 2014-2018. 

To meet its mission of protecting investors; maintaining fair, orderly, and efficient 

markets; and facilitating capital formation, the SEC established the following four 

strategic goals: 

 

3

 Pub.L. 111-352, 124 Stat. 3866 (2011). 

4

 OMB M 10-24, Performance Improvement Guidance: Management Responsibilities and Government 

Performance and Results Act Documents; June 25, 2010. 
U.S. SECURITIES AND EXCHANGE COMMISSION OFFICE OF INSPECTOR GENERAL

REPORT NO. 533 4 MARCH 10, 2016 

For each goal listed above, the SEC also developed strategic objectives. For example, 

Strategic Goal 2 has the following three corresponding strategic objectives: (1) the SEC 

fosters compliance with Federal securities laws; (2) the SEC promptly detects and 

deters violations of the Federal securities laws; (3) the SEC prosecutes violations of 

Federal securities laws and holds violators accountable through appropriate sanctions 

and remedies. To gauge its progress in achieving these strategic objectives, the SEC 

uses various performance goals. According to the SEC’s FY 2014 Agency Financial 

Report, OCIE is responsible for two of the SEC’s three annual performance goals 

related to the agency’s Strategic Goal 2: (1) number of industry outreach and education 

programs targeted to areas identified as raising particular compliance risks; and 

(2) percentage of IAs, ICs, and broker-dealers examined during the year. 

GPRAMA also requires agencies to make public each year an annual performance plan 

that is consistent with the agency’s strategic plan and describes the agency’s planned 

level of performance during the current and next FYs. Agency annual performance 

plans should establish a balanced set of performance indicators to be used in 

measuring or assessing progress toward each performance goal, and provide a basis 

for comparing actual program results with established performance goals. OMB

Circular A-11 states that performance information from the annual performance plan 

should inform agency budget decisions and complement other factors in the budget 

process. Performance information includes goals, indicators of past performance, and 

other evidence such as evaluations. 

OCIE Policies and Procedures for Establishing Priorities and Risks. To 

accomplish its goals and foster compliance with Federal securities laws, in part, each 

year, OCIE issues publicly a document that identifies its calendar year examination 

priorities. The priorities reflect certain practices and products that OCIE identifies as 

potentially heightened risk to investors and the integrity of the capital markets. OCIE 

develops its examination priorities based on a range of factors, including ongoing 

monitoring of the markets; industry trends; SEC-wide priorities; and input from senior 

officers, regional staff, other SEC divisions, and other Federal, state, and local 

SEC 

Strategic 

Goals

Strategic Goal 1. Establish and maintain an effective regulatory 

environment.

Strategic Goal 2. Foster and enforce compliance with Federal securities 

laws. 

Strategic Goal 3. Facilitate access to the information investors need to 

make informed investment decisions. 

Strategic Goal 4. Enhance the Commission’s performance through 

effective alignment and management of human, information, and 

financial capital. 
U.S. SECURITIES AND EXCHANGE COMMISSION OFFICE OF INSPECTOR GENERAL

REPORT NO. 533 5 MARCH 10, 2016 

regulators.5 Although OCIE expects to allocate significant resources to these priorities, 

as previously discussed, its staff also conducts examinations focused on risks, issues, 

and policy matters that arise from market developments and new information learned 

from examinations or other resources, including TCRs. 

In addition, OCIE’s NEP Manual provides guidance to NEP staff on various aspects of 

the NEP. As stated in the NEP Manual, many factors need to be considered when 

assessing risk and determining whether, to what extent, and what kind of examination is 

warranted. The NEP Manual lists various examples of categories of information staff 

should consider, including TCRs, news or media concerns, outside business activities of 

the entity or its personnel, supervisory concerns, financial stress, and the length of time 

since registration or last examination. To further support NEP staff, OCIE’s Office of 

Risk Analysis and Surveillance (ORAS) informs and facilitates the NEP’s risk-based 

strategies to refine firm risk profiles and better identify potential examination candidates. 

ORAS does this by: (1) publishing internal reports on certain risks and activities; 

(2) monitoring registration and filing data, media reports, court filings, and public 

records; (3) generating internal examination referrals; and (4) providing entity specific 

data and information to staff.6 

Examination Coverage of IAs. The almost 2,000 formal examinations OCIE 

conducted in FY 2015 was an increase over each of the previous four FYs. However, 

as stated in testimony before the U.S. House of Representatives Committee on 

Financial Services, the SEC Chair has reported: 

While the SEC makes increasingly effective and efficient use of its limited 

resources, we nevertheless were in a position to only examine 9% of 

registered investment advisers in fiscal year 2013. In 2004, the SEC had 

19 examiners per trillion dollars in investment adviser assets under 

management. Today, we have only 8. More coverage is plainly needed, 

as the industry itself has acknowledged.7

 

Section 914 of Title IX of the Dodd-Frank Wall Street Reform and Consumer Protection 

Act (Dodd-Frank)8

 required the SEC to review and analyze the need for enhanced 

examination and enforcement resources for IAs. It expressly required that the agency 

examine its number and frequency of examinations of IAs over the 5 years preceding 

 

5

For each initiative, the Associate Director for the IA/IC program sends out initiation memorandums or emails to examiners that include information about the initiative as well as guidance for conducting 

examinations. We obtained the initiation memorandums that OCIE issued as of July 2015 and found 

that OCIE generally established targets for its priorities and initiatives, including the number of 

examinations to conduct and a timeframe by which to conduct them. 

6 ORAS has 14 employees whose mission is to drive OCIE’s risk-focused examination strategy and the 

efficient and effective use of resources. 

7

Testimony on “Oversight of the SEC’s Agenda, Operations, and FY 2015 Budget Request.” SEC Chair 

Mary Jo White before the Committee on Financial Services, United States House of Representatives; 

April 29, 2014. 

8

 P.L. 111-203, 124 Stat. 1376 (2010). 
U.S. SECURITIES AND EXCHANGE COMMISSION OFFICE OF INSPECTOR GENERAL

REPORT NO. 533 6 MARCH 10, 2016 

the date of the legislation. The resulting report – Study on Enhancing Investment 

Adviser Examinations (January 2011)9

– stated that the number of resources and the 

amount of time required to conduct an examination depends on: (1) the size and 

complexity of an IA’s operations; (2) the level of cooperation provided to the examiners; 

and (3) the scope, method, and efficiency of examinations conducted by OCIE.10 

Moreover, the study stated that although the SEC’s resources and number of OCIE staff 

may increase in the next several years, the number of OCIE staff is unlikely to keep 

pace with the growth of registered IAs. As a result, the SEC likely will not have 

sufficient capacity in the near or long term to conduct effective examinations of 

registered IAs with adequate frequency. According to the study, Congress should 

consider the following three options to strengthen the SEC’s IA program:

1. imposing user fees on SEC-registered IAs to fund their examinations by OCIE; 

2. authorizing one or more self-regulatory organizations to examine, subject to SEC 

oversight, all SEC-registered IAs; and

3. authorizing FINRA to examine dual registrants for compliance with the 

Investment Advisers Act of 1940. 

The SEC Office of the Investor Advocate’s first two reports also identified the IA 

coverage level to be inadequate. Specifically, the Report on Activities for FY 2014 

states, “...the SEC examined approximately 10 percent of investment advisers, which 

equates to an examination cycle of once every 10 years. This level of coverage is 

simply inadequate to protect investors from fraudulent or abusive practices like 

excessive or undisclosed fees, unauthorized trading, or outright theft.”11

 Furthermore, 

the Report on Objectives for FY 2015 states: “The increasing size, sophistication, and 

complexity of investment advisers make SEC examinations more challenging and timeconsuming. Yet, SEC resources devoted to examinations have not reflected the 

magnitude of the changes in the industry.”

12

 

On November 24, 2014, the House Subcommittee on Capital Markets and Government 

Sponsored Enterprises sent the SEC Chair a letter asking how the SEC plans to 

reallocate existing resources to increase registered IA examinations. On December 16, 

 

9

 The Division of Investment Management, with assistance from other divisions and offices, conducted the 

study. 

10 OCIE generally conducts three types of IA/IC examinations: (1) examinations of higher-risk IAs, 

(2) cause examinations resulting from TCRs, and (3) special purpose reviews such as risk-targeted 

examination sweeps and risk assessment reviews. The number of examiners conducting an individual 

examination varies based on the type of examination and the particular characteristics of the IA being 

examined. Although a limited examination (one that seeks to achieve a limited purpose) may be 

completed in only a few days, more comprehensive examinations may take several weeks or months to 

complete. 

11 Office of the Investor Advocate Report on Activities for FY 2014 (filed December 23, 2014). 

12 Office of Investor Advocate Report on Objectives for FY 2015 (filed June 30, 2015). 
U.S. SECURITIES AND EXCHANGE COMMISSION OFFICE OF INSPECTOR GENERAL

REPORT NO. 533 7 MARCH 10, 2016 

2014, the SEC Chair responded by stating that the SEC will strive to increase coverage 

of IAs without sacrificing quality or coverage in other areas. To achieve that goal, the 

Chair cited the creation of ORAS within OCIE and also noted that the SEC has 

enhanced its use of advanced quantitative techniques and has launched an 

examination initiative directed at nonprivate fund IAs that have never been examined. 

In October 2015, the SEC Director of the Division of Investment Management testified 

before the House Subcommittee on Capital Markets and Government Sponsored 

Enterprises and stated that SEC staff is developing a recommendation for the SEC’s 

consideration that, if proposed and adopted, would establish a program of third-party 

compliance reviews for registered IAs. The reviews would not replace examinations 

conducted by OCIE but would supplement them to improve compliance by registered 

IAs.13

Because of (1) the increased scrutiny of the SEC’s examination coverage of IAs and the 

management challenge it presents, and (2) the size of the IA/IC program compared to 

other OCIE program areas, our evaluation focused primarily on the IA/IC program. 

Objectives 

Our objective was to assess OCIE’s efficiency and effectiveness in managing its human 

resources to address mission priorities and long-term goals, particularly for IA 

examinations. Specifically, we sought to determine: 

 the methodology and evidence supporting OCIE’s budget requests and the 

allocation of personnel to OCIE programs, including examinations of IAs and ICs; 

 how OCIE identifies and monitors examination targets (number and types) by 

program area; and 

 how OCIE adjusted its examination targets or resource allocations based on the 

SEC FY 2015 budget approved by Congress. 

We conducted our fieldwork primarily at the SEC’s Headquarters but also coordinated 

with regional personnel. We interviewed OCIE’s current and former Directors; the 

Associate Directors for each of its main programs; the SEC Chief Financial Officer to 

gain an understanding of the SEC budgeting processes and the agency’s annual 

performance plans; and the former SEC Deputy Chief of Staff to gain an understanding 

of the agency’s 2014-2018 Strategic Plan. We obtained and reviewed SEC policies and 

procedures; documents encompassing OCIE’s budget requests for FY 2013, FY 2014, 

and FY 2015; and internal OCIE documents related to its examination plans. We also 

 

13 Testimony on “Oversight of the SEC’s Division of Investment Management.” David W. Grim, Director of 

the Division of Investment Management, before the Subcommittee on Capital Markets and Government 

Sponsored Enterprises, United States House of Representatives; October 23, 2015. 
U.S. SECURITIES AND EXCHANGE COMMISSION OFFICE OF INSPECTOR GENERAL

REPORT NO. 533 8 MARCH 10, 2016 

obtained access to OCIE’s examination tracking system, TRENDS, and generated 

reports for examinations conducted during the period under review. 

Although our efforts focused on OCIE’s program-level management to address strategic 

goals and objectives, we anticipate performing future reviews of OCIE’s detailed 

operations to further assess its efficiency and effectiveness. 

Appendix I includes additional information on our scope and methodology, our review of 

internal controls, prior audit coverage, applicable Federal laws and guidance, and SEC

policies and procedures. 
U.S. SECURITIES AND EXCHANGE COMMISSION OFFICE OF INSPECTOR GENERAL

REPORT NO. 533 9 MARCH 10, 2016 

Results

Improvements Are Needed in OCIE’s Management of the 

IA/IC Program 

The Government Accountability Office’s (GAO) Standards for Internal Control in the 

Federal Government14 states that an entity determines its mission, sets a strategic plan, 

establishes objectives, and formulates plans to achieve its objectives. These standards 

outline the overall framework for establishing and maintaining an effective internal 

control system that provides reasonable assurance that the objectives of an entity will 

be achieved. Additionally, GAO has established a risk-management framework to help 

managers make decisions about allocating finite resources and take action under 

conditions of uncertainty.15

According to the SEC’s FY 2014 Congressional Budget Justification, the agency’s 

goal is to examine roughly the same proportion of IAs as FINRA achieves in its 

examination of broker-dealers, which is about half.16 OCIE personnel referred to the 

goal of examining 50 percent of registered IAs each year as an “aspirational goal”

primarily because obtaining the required human resources to achieve that goal may not 

be feasible within the current budget environment. For example, in FY 2015, the SEC 

requested 316 additional positions for OCIE in its Congressional Budget Justification but 

OCIE received only 91 positions. In FYs 2013 and 2014, OCIE received just 

43 positions out of the 547 positions the SEC requested for OCIE. Due to these 

resource constraints, OCIE manages the IA/IC program not based on a long-term goal 

of examining 50 percent of IAs but rather based on the annual goals for each of its 

performance metrics.17

 In FY 2015, OCIE met its annual goal of examining 10 percent 

of registered IAs. In FY 2016, OCIE estimates that it will examine 12 percent of 

registered IAs. 

 

14 U.S. Government Accountability Office, Standards for Internal Control in the Federal Government

(GAO/AIMD-00-21.3.1, November 1999). In September 2014, GAO revised the Standards for Internal 

Control in the Federal Government (GAO-14-704G, September 2014). The revised standards were not 

effective until FY 2016, although agency management could have adopted them earlier. 

15 GAO developed the risk-management framework based on criteria that include GAO best practices, 

OMB circulars, Standards for Internal Control in the Federal Government, and the Government 

Performance and Results Act of 1993. 

16 In February 2013, OCIE’s Deputy Director e-mailed two OCIE staff members, informing them that the 

SEC Chair wanted to make it a priority within the FY 2014 budget request to ask for resources 

necessary to start a multi-year effort to “dramatically increase” examination coverage of IAs. 

17 In its FY 2016 Annual Performance Plan, the SEC identified OCIE’s Director as the Goal Leader for the 

following performance goals: (1) number of industry outreach and education programs targeted to areas 

identified as raising particular compliance risks; (2) percentage of firms receiving deficiency letters that 

take corrective action in response to all exam findings; (3) percentage of IAs, ICs, and broker-dealers 

examined during the year; (4) percentage of compliance exams that are timely concluded in accordance 

with OCIE’s statutory deadline; and (5) number of joint exams, information sharing agreements, and 

formal meetings with other regulators. 
U.S. SECURITIES AND EXCHANGE COMMISSION OFFICE OF INSPECTOR GENERAL

REPORT NO. 533 10 MARCH 10, 2016 

We recognize that there are factors outside of OCIE’s control that affect the number of 

registered IAs that OCIE can examine, including the number of new positions OCIE 

receives and the total number of registered IAs. We commend OCIE for seeking new 

ways to increase its efficiency and IA examination coverage. In the last few years, 

OCIE has developed a risk-based examination strategy and made significant 

enhancements in data analytics and technology. For example: 

 in FY 2014, OCIE’s Quantitative Analytics Unit developed the National Exam 

Analytics Tool. According to the SEC’s FY 2014 Agency Financial Report, this 

tool “enables examiners to review years of trading data and millions of 

transactions in minutes.” And, 

 in 2012, OCIE implemented an electronic examination platform called the 

Tracking Reporting Examination National Documentation System (TRENDS). 

OCIE uses TRENDS to track and report NEP examination data and manage 

electronic documents for all examinations. 

The FY 2015 Agency Financial Report explains that, because OCIE’s examination 

programs are risk-based, such enhanced capabilities “have enabled each program to 

better allocate its limited resources to high-risk firms and practices.” However, we did 

not identify a link between OCIE’s annual operational goals and the SEC’s long-term 

goal of examining 50 percent of registered IAs. Specifically: 

 OCIE’s performance measure – the percentage of IAs examined – may not 

provide meaningful information; and 

 the IA/IC program has not fully adopted the GAO risk-management framework. 

OCIE’s Performance Measure – Percentage of IAs Examined Each 

Year – May Not Provide Meaningful Information Due To Variations in 

Exam Types, Examination Candidates, and Regional Office 

Processes 

GAO’s Standards for Internal Control in the Federal Government states that 

management should design control activities to achieve objectives. The document 

further states that performance measures and indicators are a common category of 

control activities and may include “comparisons and assessments relating different sets 

of data to one another so that analyses of the relationships can be made and 

appropriate actions taken.” 

Variations in Exam Types. OCIE conducts on-site examinations of IAs with teams of 

specialized examiners and other staff. The number of examiners conducting an 

individual exam varies based on several factors, including the type of exam being 

conducted. A limited exam (that is, one that seeks to achieve a limited purpose) may be 

completed in only a few days with few examiners. More comprehensive exams may 

take several weeks or months to complete with a larger examination team. However, 
U.S. SECURITIES AND EXCHANGE COMMISSION OFFICE OF INSPECTOR GENERAL

REPORT NO. 533 11 MARCH 10, 2016 

for the purposes of measuring and reporting on its performance, OCIE counts each 

exam equally. Given the variation in scope and intended purpose of the different types 

of exams, counting each exam equally as part of the OCIE-wide metric may not provide 

OCIE management with meaningful information to assess the efficiency and 

effectiveness of the IA/IC program, particularly in meeting stated goals. 

Variations in Examination Candidates. The number of SEC-registered IAs has 

increased about 31 percent over the last decade and the number of assets under 

management by these advisers has increased more than two-fold. As of 2016, there 

are more than 11,900 registered IAs with $66 trillion in total assets under management 

and a variety of often complex operations. Among IAs, business activity can also vary, 

as follows: 

 462 IAs (or about 4 percent) are also broker-dealers, and about 82 percent are 

registered with FINRA; 

 4,041 IAs (or about 34 percent) conduct investment advisory business out of 

multiple office locations, including offices that are not in the U.S.; 

 1,449 IAs (or about 12 percent) advise wrap-fee programs;18

 5,154 IAs (or about 43 percent) have custody (including through a related 

person) of about $22 trillion in assets under management; and 

 4,489 IAs (or about 38 percent) report 29,400 private funds with gross assets of 

$10.4 trillion. 

As noted above, the number of examiners assigned to an exam depends on several 

factors, including the make-up and characteristics of the IA. OCIE may assign only two 

examiners to conduct an examination of a small adviser with limited operations 

managing portfolios of equity securities for clients. More examiners, including those 

with special expertise, are required to conduct an examination of a large adviser. In 

addition, examinations of higher-risk advisers may require additional time and staffing 

because OCIE staff may need to conduct more inquiry into the operations relevant to 

the risks associated with such advisers. 

Variations in Regional Office Processes. OCIE’s regional offices vary in available 

examination resources, the number of registered IAs overseen, the amount of assets 

under management, and the number of exams completed each year. According to 

OCIE management, these differences, in part, result in differences in many regional 

office processes, including how each office selects candidates for exam. Table 2 

shows the range (from low to high) across the regional offices of the number of 

 

18 A wrap-fee program is any advisory program under which an IA provides investment advisory services 

(which may include portfolio management or advice concerning the selection of other IAs) and executes 

client transactions and charges a specified fee or fees not based directly upon transactions in a client’s 

account. 
U.S. SECURITIES AND EXCHANGE COMMISSION OFFICE OF INSPECTOR GENERAL

REPORT NO. 533 12 MARCH 10, 2016 

registered IAs, the amount of assets under management, and the number of OCIE 

employees assigned to the IA/IC program in FY 2016, and IA examinations completed 

in FY 2013, FY 2014, and FY 2015. 

Table 2. Registered IAs, Assets Under Management, and 

Examinations Conducted19

Range

Number of 

Registered I/As

in FY 2016

Amount of 

Assets Under 

Management

in FY 2016

Number of 

IA/IC 

Employees

in FY 2016

Examinations 

Completed

FY 

2013

FY 

2014

FY 

2015

Low 552 $733 Billion 16 35 44 47

High 2,800 $17.8 Trillion 98 203 237 227

Overall Total 11,956 $66.7 Trillion 467 965 1,150 1,221

Source: OIG-generated based on OCIE Executive Reports dated October 15, 2013, October 14, 2014, and 

October 19, 2015.

OCIE senior managers told us that they give regional offices and program areas some 

autonomy to select examination candidates and address factors such as variations in 

populations, staffing, local initiatives, and market conditions. According to OCIE 

management, this autonomy is paramount to executing a risk-based examination 

program because localized knowledge often plays a critical role. 

Notwithstanding the value of localized knowledge, in 2014, an OCIE Risk and Exam 

Process Steering Committee reviewed each regional office’s process for selecting 

examination candidates to determine whether additional guidance was needed to 

enhance and promote consistency across OCIE. In November 2014, the Committee 

issued to OCIE senior management an internal memorandum stating that, among 

other things, “...the significant differences among the exam candidate selection 

processes is an area of exposure for the NEP.” The Committee recommended that 

OCIE management consider defining the minimal steps that each regional office’s 

examination candidate selection process should include.20

 

We sought to follow-up on the recommendations of the Risk and Exam Process 

Steering Committee. OCIE management told us that the internal memorandum 

produced by the Committee was only a draft document and that the Committee was in 

the process of updating the document. Therefore, we contacted all 11 regional offices 

to inquire about their processes for selecting examination candidates. Based on the 

responses we received, we reached conclusions similar to those of the Committee. 

For example, we found differences among the regional offices with regard to the 

number and level of persons tasked with examination candidate selection and their 

use of registrant data. Specifically, we received varying responses regarding who was 

the primary individual(s) tasked with executing the examination candidate selection 

 

19 The figures under each range do not necessarily correspond to a single office, but rather are intended 

to show either the lowest or highest figure amongst all regional offices for each category. 

20 As of the date of this report, OCIE management was reviewing this issue. 
U.S. SECURITIES AND EXCHANGE COMMISSION OFFICE OF INSPECTOR GENERAL

REPORT NO. 533 13 MARCH 10, 2016 

process and whether a formal plan is prepared and submitted to SEC Headquarters. 

We found that the larger regional offices tend to have a more robust process for 

selecting examination candidates whereas the smaller offices typically rely on regional 

management. Some of the more significant differences are as follows: 

 In one office, examiners are working with OCIE’s Quantitative Analytics Unit 

and others to develop more comprehensive and current management 

information systems that will aggregate both qualitative and quantitative 

registrant information. For example, the office is testing a vendor-supplied 

program that seeks to identify outliers based on publicly available data. 

Furthermore, the program has undertaken an initiative to acquire other tools 

that will allow for the mapping and visualization of registrant data, making it 

easier to spot trends and target the deployment of staff resources. 

 In another office, a Risk Management Strategist is primarily responsible for 

managing the examination candidate selection process. The Risk Management 

Strategist assigns “due diligence” reviews to examiners based on her 

assessment of risk using an algorithm this office developed.21 Examiners 

typically perform two to three due diligence reviews each year for this office to 

maintain a pool of examination candidates ready for scheduling at all times. 

 Three offices expressed the challenge of having fewer resources. Two of the 

three offices stated that their management teams are primarily responsible for 

selecting examination candidates and that, although there are advantages to 

management’s involvement, leading the selection process while also managing 

examinations and meeting administrative responsibilities can be challenging. 

In addition to differences in the registrant populations and how regional offices plan 

examinations, regional offices may also be conducting examinations differently. For 

example, according to OCIE: 

 while all regional offices rotate lead examiners, some offices do not rotate new 

examiners until they have sufficient experience; 

 10 of the 12 offices have examiners work on more than one exam at a time; and 

 9 of the 12 offices have staff return to the office while waiting for information from 

the registrant under examination. 

GAO’s Standards for Internal Control in the Federal Government states that if 

substantially different controls, such as examination policies and procedures, were used 

at different times during the period under evaluation, management should evaluate 

operating effectiveness separately for each unique control system (that is, regional 

office). 

 

21 Due diligence reviews are limited scope, information-gathering assessments used to determine 

whether an examination is warranted. 
U.S. SECURITIES AND EXCHANGE COMMISSION OFFICE OF INSPECTOR GENERAL

REPORT NO. 533 14 MARCH 10, 2016 

The variation in how examinations are staffed and performed may affect OCIE 

management’s ability to identify inefficiencies and compare office performance. As 

shown in Table 3, there is a wide range between the office with the lowest average 

number of examinations-per-examiner each year and the office with the highest 

average number of examinations-per-examiner each year. 

Table 3. Average Number of IA/IC Examinations-per-Examiner22 for 

FY 2013, FY 2014, and FY 2015 

Range

Exam/Staff

FY 2013 FY 2014 FY 2015

Low 1.70 1.77 2.36

High 4.48 5.13 4.63

Overall Average 2.64 3.14 3.26

Source: OIG-generated based on exam figures obtained from TRENDS 

and staffing data obtained from OCIE.

In September 2015, OCIE hired a consultant to identify areas for possible 

improvement and study OCIE’s processes for assigning staff to examinations, 

including: 

 OCIE’s organizational structure, using an open architecture model for staffing 

examinations, workload distribution among managers, and supervisory review 

of examination processes; 

 processes and methods used to identify and staff examinations, use of staff 

with subject matter expertise, and use of specialized units or teams; 

 processes for scheduling, scoping, and conducting examinations; 

 processes for managing human resources and measuring productivity; and

 examination coverage of entities regulated by the SEC and potential 

alternatives for increasing coverage while maintaining or improving 

examination quality and effectiveness. 

According to management, this study will help OCIE identify ways it can more 

efficiently use its resources, increasing the number of examinations its staff can 

conduct. Management expects the consultant will report its findings and 

recommendations, if any, by September 2016. 

 

22 Includes examiners, accountants, attorney examiners, exam managers, and Assistant Directors. 
U.S. SECURITIES AND EXCHANGE COMMISSION OFFICE OF INSPECTOR GENERAL

REPORT NO. 533 15 MARCH 10, 2016 

The IA/IC Program Has Not Fully Adopted the GAO Risk-Management 

Framework 

As required by Dodd-Frank, GAO regularly reviews the SEC’s oversight of FINRA.23 

Most recently, GAO assessed documents, procedures, and guidance from OCIE’s 

Office of Market Oversight, which is responsible for FINRA oversight. GAO also 

compared Market Oversight’s FINRA risk-assessment process with (1) similar 

processes used by the Board of Governors of the Federal Reserve System and the 

Federal Housing Finance Authority, and (2) GAO’s risk-management framework. 

GAO has reported on the benefits of risk management and identified elements of a riskmanagement framework for Federal agency oversight efforts.24

 According to GAO, risk 

management is a strategy for helping make decisions about assessing risks, allocating 

resources, and taking actions under conditions of uncertainty. GAO has stated that, 

“The ability to anticipate future happenings and to choose among alternatives lies at the 

heart of risk management and provides us with a guide, based on good management 

practices and supported by established internal controls, that can enhance decision 

making.” GAO’s risk-management framework provides that management decisions 

should be made in the context of a strategic plan, with clearly articulated goals and 

objectives that flow from the plan. As Table 4 shows, GAO’s risk-management 

framework has five phases. 

Table 4. GAO Risk-Management Framework 

Phase Definition

1. Strategic Goals, Objectives, and 

Constraints Identification

Identifying the strategic goals that an agency is trying to 

achieve and the steps needed to attain those goals, 

including determining limitations or constraints that can 

affect the desired outcomes. 

2. Risk Assessment Identifying the key aspects of potential risks.

3. Alternatives Evaluation Considering measures to reduce the identified risks.

4. Management Selection 

Management selecting where resources and investments 

will be made based on selecting the appropriate alternatives 

for reducing risks.

5. Implementation and Monitoring

Applying and monitoring the selected alternatives for 

reducing risk to help ensure ongoing effectiveness, including 

the implementation of new policies, procedures, and controls 

and how these procedures are documented and maintained. 

Source: U.S. Government Accountability Office, SEC Can Further Enhance Its Oversight Program of FINRA (GAO15-376, April 2015). 

 

23 Section 964 of the Dodd-Frank Act. 

24 U.S. Government Accountability Office, Further Refinements Needed to Assess Risks and Prioritize 

Protective Measures at Ports and Other Critical Infrastructure (GAO-06-91, December 2005). 

U.S. Government Accountability Office, SEC Can Further Enhance Its Oversight Program of FINRA

(GAO-15-376, April 2015).
U.S. SECURITIES AND EXCHANGE COMMISSION OFFICE OF INSPECTOR GENERAL

REPORT NO. 533 16 MARCH 10, 2016 

The risk management framework could aid in assessing risks, allocating resources, and 

enhancing decision making for the IA/IC program. OCIE’s examinations of IAs could 

better support the SEC’s strategic goal of fostering compliance with Federal securities 

laws if OCIE management established a long-term IA/IC goal with a realistic plan to 

achieve that goal and performance indicators that track progress toward meeting that 

goal. Management should ensure that OCIE’s performance metrics allow management 

to assess performance and ensure efficient and effective use of resources across 

regional offices. 

In its April 2015 report, GAO reported that, although OCIE’s Office of Market Oversight 

had taken some steps to assess its oversight of FINRA, it lacked performance goals or 

measures specific to assessing whether it had met its stated goal of enhancing 

oversight of FINRA. Specifically, GAO stated: 

. . . Performance measures must be clear, concise, and measurable and 

can be used to measure progress toward these goals. Furthermore, 

leading practices in federal performance management that [GAO] 

previously identified state that performance measures should have 

appropriate targets. Internal control standards in the federal government 

call for agencies to develop control activities to help ensure that 

management’s directives are carried out, for example, by establishing 

performance measures that align with their mission and compare 

performance against targets. 

GAO recommended that the SEC establish specific performance goals and 

performance measures as well as related targets to assess the program’s progress in 

meeting those goals. The SEC concurred with GAO’s recommendation and the Office 

of Market Oversight has begun adopting the GAO risk management framework to: 

(1) develop specific performance goals and measures, with corresponding targets to 

monitor its progress toward the goal of enhancing FINRA oversight; (2) formalize 

procedures for documenting its oversight determinations, such as selecting FINRA 

areas for inspections and any changes made to planned oversight activities; and 

(3) perform an assessment of internal risks, such as staff availability and competing 

priorities, to successfully meeting FINRA oversight program goals and objectives.25

Conclusion 

OCIE has worked to increase its examination coverage of IAs, including creating 

ORAS and enhancing its use of advanced quantitative techniques and technology, 

and continues to seek new ways to increase its efficiency and IA examination 

coverage given its limited resources. However, we found that OCIE’s management of 

IA examination goals and performance metrics can be more consistent with Federal 

internal control and risk management standards. Doing so will help ensure that 

 

25 GAO did not review the IA/IC program and its review was limited to OCIE’s Office of Market Oversight. 

Therefore, the findings and corresponding recommendations included in GAO’s report did not pertain to 

the IA/IC program. 
U.S. SECURITIES AND EXCHANGE COMMISSION OFFICE OF INSPECTOR GENERAL

REPORT NO. 533 17 MARCH 10, 2016 

examinations support OCIE’s examination priorities, as well as the SEC’s long-term 

goal. In addition, management should ensure that OCIE’s performance metrics allow 

management to assess performance and ensure efficient and effective use of OCIE’s 

limited resources across regional offices. 

Recommendations, Management’s Response, and Evaluation of 

Management’s Response

To improve the efficiency and effectiveness of OCIE’s human resource management to 

meet OCIE’s long-term goals, including those for IA examinations, we recommend the 

following:

Recommendation 1: The Office of Compliance Inspections and Examinations should 

(a) provide to the Office of Inspector General the results of its consultant’s efficiency 

study when the study is complete, and (b) consider the results of the study and its Risk 

and Exam Process Steering Committee’s recommendations to improve investment 

adviser/investment company program planning and staffing processes. 

Management’s Response. The Office of Compliance Inspections and 

Examinations concurred with the recommendation and will provide the results of the 

consultant’s study to the Office of the Inspector General once the study is complete. 

The Office of Compliance Inspections and Examinations will also review the 

recommendations of the consultants, as well as any recommendations from the 

Exam Process Steering Committee, once both are complete. 

OIG’s Evaluation of Management’s Response. Management’s proposed actions 

are responsive; therefore, the recommendation is resolved and will be closed upon 

verification of the action taken. 

Recommendation 2: The Office of Compliance Inspections and Examinations should 

consider fully implementing the Government Accountability Office’s risk-management 

framework in the investment adviser/investment company program. The framework 

includes five components: (a) identifying strategic goals, objectives, and constraints; 

(b) identifying key aspects of potential risk; (c) considering measures to reduce 

identified risks; (d) selecting where resources and investments will be made based on 

selecting the appropriate alternatives for reducing risks; and (e) implementation and 

monitoring. 

Management’s Response. The Office of Compliance Inspections and 

Examinations concurred with the recommendation and will further consider the 

Government Accountability Office’s risk-management framework and how it may 

implement additional aspects of the framework within the IA/IC examination 

program. 

OIG’s Evaluation of Management’s Response. Management’s proposed actions 

are responsive; therefore, the recommendation is resolved and will be closed upon 

verification of the action taken. 
U.S. SECURITIES AND EXCHANGE COMMISSION OFFICE OF INSPECTOR GENERAL

REPORT NO. 533 18 MARCH 10, 2016 

Other Matters of Interest 

During the course of our evaluation, we identified other matters of interest that did not 

warrant recommendations. We discussed these matters with OCIE management. 

OCIE Did Not Maintain Evidence of Staffing Requests in a Central Location. For 

FYs 2013 through 2015, OCIE submitted to the Office of Financial Management (OFM) 

its staffing requests for the purpose of building the SEC’s Authorization Request to 

Congress. OCIE officials provided us e-mails from senior OCIE and OFM officials that 

highlighted the methodology and rationale for OCIE’s budget requests. However, we 

found that OCIE’s budget requests were based primarily on informal discussions and 

analysis documented within these e-mails. Without maintaining formal evidence in a 

centralized location, OCIE cannot readily confirm its budget requests are meeting the 

minimum requirements set forth by OFM from year to year. OCIE management should 

consider formalizing the process for developing OCIE’s budget requests. 

OCIE Allocated FY 2015 Resources Based on its Congressional Budget 

Justification. As part of our evaluation objectives, we reviewed how OCIE adjusted its 

examination targets or resource allocations based on the SEC’s FY 2015 budget 

approved by Congress. We determined that OCIE’s planned examinations are based 

on risk analysis in conjunction with the NEP’s examination priorities and not on the 

number of positions allocated. With regard to resource allocation, we found that OCIE 

allocated the 91 OCIE positions approved for FY 2015 based on the percentages in the 

FY 2015 Congressional Budget Justification. Therefore, we have no findings or 

recommendations related to this evaluation objective. 
U.S. SECURITIES AND EXCHANGE COMMISSION OFFICE OF INSPECTOR GENERAL

REPORT NO. 533 19 MARCH 10, 2016 

Appendix I. Scope and Methodology 

We conducted this evaluation from January 2015 through March 2016 in accordance 

with the Council of the Inspectors General Quality Standards for Inspection and 

Evaluation (2012). Those standards require that we plan and perform the evaluation to 

obtain evidence sufficient to provide reasonable basis to support our findings and 

recommendations. We believe that the evidence obtained provides a reasonable basis 

for our findings and conclusions based on our evaluation objectives. 

Scope. The evaluation covered the period of January 2011 to December 2015.26 Our 

objective was to evaluate OCIE’s efficiency and effectiveness in managing its human 

resources to meet its long-term goals. Specifically, we sought to determine: 

 the methodology and evidence supporting OCIE’s budget requests and the 

allocation of personnel to OCIE programs, including examinations of IAs and ICs; 

 how OCIE identifies and monitors examination targets (number and types) for 

each OCIE program; and 

 how OCIE adjusted its examination targets or resource allocations based on the 

SEC’s FY 2015 budget approved by Congress. 

We conducted fieldwork at the SEC’s Headquarters in Washington, DC and coordinated 

with regional personnel. Although our focus was on OCIE, we also considered OFM 

(SEC budget process) and the Office of the Chair (SEC 2014-2018 Strategic Plan) and 

how these offices assisted in determining OCIE’s resource needs. 

Methodology. To gain an understanding of OCIE’s policies and procedures for the 

development of budget requests and the allocation of personnel, we first met with 

personnel from the SEC’s OFM, including the Chief Financial Officer. We gained an 

understanding of the agency’s annual performance plans and how those plans relate to 

the SEC’s strategic plan and requests for additional resources in the last few years. We 

reviewed OFM’s reference guide for the budget formulation process (OFM Reference 

Guide, Chapter 04-02 Budget Formulation and Execution: Budget Formulation Process; 

December 8, 2010), and confirmed with OFM the key dates in the SEC’s FY 2013, FY 

2014, and FY 2015 budget formulation processes. We obtained and reviewed OCIE’s 

budget requests for FY 2013 through FY 2015, along with documents supporting the 

justification for those requests. We also met with personnel from the Office of the SEC 

Chair, OCIE’s current and former Director, Associate Directors for each of OCIE’s major 

programs, and the SEC Investor Advocate. Additionally, we reviewed Federal laws that 

address the budget process and compared those laws to SEC policies and procedures. 

 

26 We focused on OCIE’s budget requests for FY 2013, FY 2014, and FY 2015. However, because the 

SEC’s budget cycle commences about 20 months prior to the fiscal year in question, our period of review 

was adjusted accordingly to begin in January 2011. 
U.S. SECURITIES AND EXCHANGE COMMISSION OFFICE OF INSPECTOR GENERAL

REPORT NO. 533 20 MARCH 10, 2016 

To evaluate how OCIE identifies and monitors examination targets for its IA/IC program, 

we met with the IA/IC program Associate Director and discussed with the Associate 

Director OCIE’s NEP priorities for the last few years. We reviewed OCIE’s 2013, 2014, 

and 2015 NEP priorities and discussed with the Associate Director how OCIE ensures 

examinations meet those priorities. We obtained and reviewed available initiation 

memos for OCIE initiatives to identify the registrant populations, number of required 

examinations by regional office, and expected completion date for each initiative. 

Additionally, we surveyed senior management from all 11 regional offices to gain an 

understanding of how senior management conducts the examination candidate 

selection process. Specifically, we sought to determine the personnel at each regional 

office responsible for overseeing the process, the data or information used to select 

examination candidates, and the nature of the examination plan prepared to document 

the selections made. We contacted an OCIE committee that had assessed the regional 

offices’ examination candidate selection processes. Moreover, we obtained the 

Statement of Work the SEC prepared to solicit a consultant to study the efficiency of 

OCIE’s staffing processes. We also obtained access to a recently implemented tool 

called Exam Metrics and Activities to determine how OCIE senior management tracks

the number of examinations performed by each of the regional offices. 

The Federal laws and guidance, as well as the SEC administrative regulations, policies, 

and procedures we reviewed included: 

Federal Laws and Guidance: 

 Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1, 

Government Accountability Office (November 1999) and updated Standards for 

Internal Control in the Federal Government, GAO-14-704G, Government 

Accountability Office (September 2014). 

 GPRA Modernization Act of 2010 (Pub.L. 111-352, 124 Stat. 3866 (2011)).

 OMB Circular A-11, Preparation, Submission, and Execution of the Budget; July 

2014. 

 Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. 111-203, 

124 Stat. 1376 (2010)). 

 Investment Advisers Act of 1940 (As Amended through Pub. L. 112-90, approved 

January 3, 2012). 

 Investment Company Act of 1940 (As Amended through Pub. L. 112-90, 

approved January 3, 2012). 

 Securities Exchange Act of 1934 (As Amended through Pub. L. 112-158, 

approved August 10, 2012). 
U.S. SECURITIES AND EXCHANGE COMMISSION OFFICE OF INSPECTOR GENERAL

REPORT NO. 533 21 MARCH 10, 2016 

SEC Administrative Regulations, Policies, and Procedures: 

 OCIE Examination Procedures, National Examination Program Manual; 

March 30, 2015. 

 OFM Reference Guide, Chapter 04-02 Budget Formulation and Execution: 

Budget Formulation Process; December 8, 2010. 

 SEC Administrative Regulation, Administrative Control Funds (SEC 12-1); 

May 28, 2014. 

Internal Controls. We obtained an understanding of OCIE’s oversight of the budget 

and examination candidate selection process and identified key internal controls. To

gain an understanding of the SEC’s management assurance process, we met with 

personnel from the Office of the Chief Operating Officer, which oversees the process. 

We obtained a copy of OCIE’s FY 2014 management assurance statement and noted 

that management found no material weaknesses in internal controls related to OCIE. 

Although management identified areas for improvement, management noted that OCIE 

is actively working to address those areas and that those areas do not create the risk of 

a material weakness. 

We also noted that under Section 961 of Dodd-Frank, the SEC is required to assess 

and report annually on internal supervisory controls for staff performing examinations. 

We obtained the SEC's Certifications of Internal Supervisory Controls for FY 2011 

through FY 2014 and noted that management did not identify any deficiencies in internal 

supervisory controls. 

Based on our review of the documents above, we determined that OCIE has 

established an effective internal control system. However, as discussed in the report, 

we found that improvements are needed in the IA/IC program to ensure OCIE efficiently 

and effectively manages its human resources to meet its long-term goals. Our 

recommendations, if implemented, should correct the weaknesses we identified. 

Computer-processed Data. GAO’s Assessing the Reliability of Computer-Processed 

Data (GAO-09-680G, July 2009) states that “data reliability refers to the accuracy and 

completeness of computer-processed data, given the uses they are intended for. 

Computer-processed data may be data (1) entered into a computer system or 

(2) resulting from computer processing.” During our evaluation, the only computerprocessed data that had a material impact on the evaluation’s findings, conclusions, or 

recommendations were examination data from TRENDS. 

We conducted interviews with OCIE personnel to understand how examiners document 

their examinations in TRENDS. We obtained access to TRENDS and conducted a 

walkthrough with OCIE personnel to learn about the system’s reporting capabilities. To 

perform limited testing of the data in TRENDS, we used TRENDS to generate reports 

on the number of examinations conducted during the period under review. We 

compared that data to examination data we obtained from OCIE personnel (data 
U.S. SECURITIES AND EXCHANGE COMMISSION OFFICE OF INSPECTOR GENERAL

REPORT NO. 533 22 MARCH 10, 2016 

external to TRENDS). Although the comparison did not yield a perfect match, we 

considered the differences in data to be immaterial. Therefore, we determined that 

TRENDS data was sufficiently reliable for the purposes of the evaluation. 

Prior Coverage. During the last 7 years, the SEC OIG and GAO issued two reports of 

particular relevance to this evaluation. Unrestricted reports can be accessed over the 

Internet at http://www.sec.gov/about/offices/oig/inspector_general_audits_reports.shtml

(SEC OIG) and http://www.gao.gov (GAO). 

SEC OIG: 

 Review of the Commission’s Processes for Selecting Investment Advisers and 

Investment Companies for Examination (Report No. 470, November 19, 2009). 

GAO: 

 SEC Can Further Enhance Its Oversight Program of FINRA (GAO-15-376, April 

2015). 
U.S. SECURITIES AND EXCHANGE COMMISSION OFFICE OF INSPECTOR GENERAL

REPORT NO. 533 23 MARCH 10, 2016 

Appendix II. Management Comments 
U.S. SECURITIES AND EXCHANGE COMMISSION OFFICE OF INSPECTOR GENERAL

REPORT NO. 533 24 MARCH 10, 2016 
U.S. SECURITIES AND EXCHANGE COMMISSION OFFICE OF INSPECTOR GENERAL

REPORT NO. 533 25 MARCH 10, 2016 

Major Contributors to the Report 

Carrie Fleming, Audit Manager 

Juan Figueroa, Lead Auditor 

John Dettinger, Auditor 

To Report Fraud, Waste, or Abuse, Please Contact: 

Web: www.reportlineweb.com/sec_oig 

Telephone: 1-877-442-0854 

Fax: (202) 772-9265 

Address: U.S. Securities and Exchange Commission 

Office of Inspector General 

100 F Street, N.E. 

Washington, DC 20549 

Comments and Suggestions 

If you wish to comment on the quality or usefulness of this report or suggest ideas for 

future audits, please contact Rebecca Sharek, Deputy Inspector General for Audits, 

Evaluations, and Special Projects at sharekr@sec.gov or call (202) 551-6061. 

Comments, suggestions, and requests can also be mailed to the attention of the Deputy 

Inspector General for Audits, Evaluations, and Special Projects at the address listed 

above.