Oversight of and Compliance With 

Conditions and Representations 

Related to Exemptive Orders and 

No-Action Letters

June 29, 2011

Report No. 482
o .... 'c" 0" 

UNLTED STATES 

SECURITIES AND EXCHANGE COMMISSION 

WASHLNGTON, D.C. 20549 

Oversight and Compliance—Exemptive Orders and No-Action Letters June 29, 2011

Report No. 482

ii

MEMORANDUM 

June 29, 2011 

To: Eileen Rominger, Director, Division of Investment Management 

Robert W. Cook, Director, Division of Trading and Markets 

Meredith Cross, Director, Division of Corporation Finance 

Carlo V. di Florio, Director, Office of Compliance Inspections and 

Examinations 

From: H. David Kotz, Inspector General, Office of Inspector General (OI ~.

Subject: Oversight of and Compliance with Conditions and Representations 

Related to Exemptive Orders and No~Action Letters, Report No. 

482 

This memorandum transmits the U.S. Securities and Exchange Commission 

OIG's final report detailing the results of our review of the SEC's oversight of and 

compliance with the conditions and representations related to exemptive orders 

and no~action letters. This review was conducted as part of our continuous effort 

to assess management of the Commission's programs and operations and as a 

part of our annual audit plan. 

The final report contains five recommendations which if fully implemented should 

enhance the Commission's oversight of compliance with conditions and 

representations in exemptive orders and no ~action letters. The respective offices 

concurred with all five of the report's recommendations. Your written response to 

the draft report is included in Appendix V. 

Within the next 45 days, please provide the OIG with a written corrective adion 

plan that is designed to address the report's recommendations. The corrective 

action plan should include information such as the responsible official/point of 

contact, timeframes for completing required actions, and milestones identifying 

how you will address the recommendations. 

t7k 
Oversight and Compliance—Exemptive Orders and No-Action Letters June 29, 2011

Report No. 482

iii

Should you have any questions regarding this report, please do not hesitate to 

contact me or Jacqueline Wilson at ext. 16326. We appreciate the courtesy and 

cooperation that you and your staff extended to our auditor. 

Attachment

cc: James R. Burns, Deputy Chief of Staff, Office of the Chairman

Luis A. Aguilar, Commissioner

Troy A. Paredes, Commissioner

Elisse B. Walter, Commissioner

Kathleen L. Casey, Commissioner

Jeff Heslop, Chief Operating Officer, Executive Director, Office of Chief 

 of Operations

James A. Brigagliano, Deputy Director, Division of Trading and Markets

John H. Walsh, Chief Counsel, Office of Compliance Inspections and 

 Examinations

Douglas J. Scheidt, Chief Counsel, Division of Investment Management

Thomas Kim, Chief Counsel, Division of Corporation Finance
Oversight and Compliance—Exemptive Orders and No-Action Letters June 29, 2011

Report No. 482

iv

Oversight of and Compliance With 

Conditions and Representations Related to 

Exemptive Orders and No-Action Letters 

Executive Summary

Background. The Securities and Exchange Commission (SEC or Commission) 

has statutory authority to issue exemptive orders, in response to an entity’s 

request, that allow the entity to engage in transactions that would otherwise be 

prohibited by the securities laws, rules, or regulations. In some instances,

instead of exemptive relief, a company may request a “no-action” letter from 

Commission staff. A no-action letter states that the staff will not recommend 

enforcement action in response to the entity’s proposed activity. Exemptive 

orders and no-action letters allow the Commission to provide flexibility and 

accommodate situations not originally contemplated by the securities laws. 

The Commission’s statutory general authority to provide exemptive relief is 

located in Section 28 of the Securities Act of 1933, Sections 12(h) and 36 of the 

Securities Exchange Act of 1934, Section 6(c) of the Investment Company Act, 

and Section 206A of the Investment Advisers Act of 1940. The Commission has 

delegated authority to its program Divisions to issue exemptive orders. The 

Division of Investment Management provides exemptive relief under the 

Investment Company Act of 1940 and the Investment Advisers Act of 1940. The 

Division of Trading and Markets provides exemptive relief pursuant to the 

Securities Exchange Act of 1934 to entities, including regulated entities such as 

broker-dealers and exchanges, and for certain market activities. The Division of 

Corporation Finance provides exemptive relief under the securities registration 

and reporting sections of the Securities Exchange Act of 1934. These divisions 

may coordinate on exemptive relief regarding cross-cutting securities laws 

issues—for example, auction rate securities.

Exemptive relief was not intended to provide unrestricted or unlimited relief from 

the securities laws and rules, however. For example, the Commission has noted 

the following regarding the general exemptive authority under the Investment 

Company Act of 1940: “[T]he exceptional power under Section 6(c) to free any 

person from any or all provisions of the [Investment Company] Act is one which 

must be exercised with circumspection and with full regard to the public interest 

and the purposes of the [Investment Company] Act . . . .”1 In order to provide 

exemptive relief under Section 36 of the Exchange Act, “the Commission must 

determine that the exemption is necessary or appropriate in the public interest 

and is consistent with the protection of investors.”2

1 In re The Great American Life Underwriters, Inc., File No. 811-423 (July 15, 1960) at 5 (footnote omitted).

 While the Commission may 

2 “Exchange Act Exemptive Applications,” www.sec.gov/rules/exempt.shtml.

 
Oversight and Compliance—Exemptive Orders and No-Action Letters June 29, 2011

Report No. 482

v 

provide unconditional exemptive relief, it generally requires that the recipient of 

the relief comply with specified conditions. If the SEC grants an exemption that 

contains conditions, the requestor must adhere to the conditions of the exemptive 

relief issued by the Commission or a Division acting pursuant to delegated 

authority in order for the exemption to have any effect. 

In some instances, instead of exemptive relief from the provisions of the 

securities laws, a company will request assurances, known as “no-action” letters, 

from Commission staff that the staff will not recommend enforcement action in 

response to the company’s proposed activity. No-action letters expressly 

represent only a position by the staff based on the facts and circumstances 

described in the request, and the letters expressly do not represent legal 

conclusions or opinions. No-action letters are intended to assist industry in 

complying with the securities laws by providing the Divisions’ staff positions on 

contemplated transactions. The Division staff clearly state in the no-action letters 

that the relief granted is based solely on the facts and representations presented, 

and that any different facts or conditions might require another conclusion.

Compliance by registered entities with the conditions and representations in 

exemptive orders and no-action letters is reviewed primarily by the Office of 

Compliance Inspections and Examinations (OCIE) as part of its inspections and 

examinations program. OCIE conducts examinations of firms that are registered 

with the Commission, including registered broker-dealers, transfer agents, 

clearing agencies, investment advisers, and investment companies (collectively 

“regulated entities”). According to OCIE, it has been a longstanding practice for 

examiners to review, as part of pre-examination work, exemptive orders and noaction letters that have been issued to the registrant being examined. OCIE 

indicated that an examination report or deficiency letter will include the results of 

OCIE’s review of compliance with exemptive orders or no-action letters if 

potential violations of the law are found. The Division of Trading and Markets’ 

Office of Market Operations has on occasion reviewed compliance with 

information technology-related conditions of certain temporary exemptive orders, 

but does not engage in any systematic monitoring of such orders.

Objectives. The objective of the review was to assess the Commission’s 

processes for ensuring adherence to the conditions under which exemptive 

orders and no-action letters are granted to regulated entities. 

Prior OIG Audit Report. The Office of Inspector General audited the exemptive 

application process in the Division of Investment Management’s Office of 

Investment Company Regulation (Report No. 408, September 29, 2006), to 

determine whether the process was timely and to recommend improvements. 

The report included 13 recommendations. Recommendations to enhance 

timeliness included issuing exemptive rules, filing applications electronically, and 

restricting or eliminating the review of draft exemptive applications. Other 

recommendations included returning poorly prepared applications, developing 
Oversight and Compliance—Exemptive Orders and No-Action Letters June 29, 2011

Report No. 482

vi

standard follow-up procedures, improving performance measures, and revising 

the database for exemptive applications. The Division of Investment 

Management concurred with and addressed all 13 recommendations, and the 

recommendations were closed. 

Results. The review found that the Commission can improve its processes for 

monitoring compliance with conditions and representations related to exemptive 

orders and no-action letters in a variety of ways. Significantly, the review found 

that the SEC’s Divisions that issue exemptive orders and no-action letters to 

regulated entities do not have a coordinated process for reviewing these entities’ 

compliance with the conditions and representations contained in the orders and 

letters, and instead rely on OCIE to review compliance as part of its 

examinations. Because exemptive orders and no-action letters allow industry 

participants to conduct activities that, without the relief, could violate the 

securities laws and regulations, the review determined that monitoring is 

important to ensure the compliance with the conditions and representations in 

exemptive orders and no-actions letters issued to regulated entities. To achieve 

effective monitoring, the Divisions should engage in increased coordination with 

OCIE’s examinations of regulated entities as they pertain to compliance with the 

conditions and representations in exemptive orders and no-action letters.

The review further determined that the Divisions separately track data regarding 

processed exemptive orders and no-action letters in various ad hoc 

spreadsheets and databases and that the collected data does not include 

information on compliance with the conditions and representations in exemptive 

orders and no-action letters. In addition, while OCIE’s examination tracking 

system tracks violations of the federal securities law identified through 

inspections and examinations, OCIE’s system does not identify the exemptive 

order or no-action letter that may be related to the violation. The review also 

found that while the Divisions and OCIE occasionally share information pertinent 

to exemptive orders and no-action letters, the process is informal and not 

systematic. Because the Divisions do not systematically capture and analyze 

data on compliance with the conditions and representations in exemptive orders 

and no-action letters issued to regulated entities, we determined that the 

Commission is less effective than it could be in monitoring compliance with such 

conditions and representations. 

Similarly, the review found that the SEC’s current organizational structure 

separates the agency’s rulemaking and examinations functions and that there is 

no formalized coordination between these functions. As noted above, there is 

also no formalized process for monitoring or ensuring compliance with the 

conditions and representations in exemptive orders and no-action letters. We 

noted that the Dodd-Frank Wall Street Reform and Consumer Protection Act of 

2010 requires the Divisions of Investment Management and Trading and Markets 

to include examiners on their staffs to provide these Divisions with expertise in 

inspections and regulations of those Divisions.
Oversight and Compliance—Exemptive Orders and No-Action Letters June 29, 2011

Report No. 482

vii

During the review, we learned that notwithstanding the fact that noncompliance 

with the conditions and representations in exemptive orders and no-action letters 

could result in significant violations of the securities laws, OCIE and the Divisions 

do not view the granting of exemptive and no-action relief, per se, as a 

substantial noncompliance risk because of the self-executing nature of the relief

granted. A sample of examination reports reviewed in our review, however, 

revealed numerous instances in which OCIE examinations found deficiencies in 

compliance with conditions and representations in exemptive orders and noaction letters. The review found that, despite the noncompliance noted, OCIE’s 

present risk-rating system does not incorporate the issuance of exemptive orders 

or no-action letters as per se risk factors. Therefore, the review determined that 

the Divisions and OCIE could identify areas of exemptive and no-action relief to 

consider as potentially significant risks.

Summary of Recommendations. The report makes five recommendations that 

are intended to enhance the Commission’s oversight of compliance with 

conditions and representations in exemptive orders and no-action letters: (1) the 

Divisions of Investment Management, Trading and Markets, and Corporation 

Finance should develop processes for coordinating with OCIE regarding 

reviewing for compliance with conditions and representations in exemptive orders 

and no-action letters issued to regulated entities on a risk basis; (2) the Divisions 

of Investment Management, Trading and Markets, and Corporation Finance, in 

coordination with the Office of Information Technology and OCIE, should develop 

and implement processes to consolidate, track, and analyze information 

regarding exemptive orders and no-action letters; (3) the Divisions of Investment 

Management and Trading and Markets should, in their plans for implementing 

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

that they establish their own examination staffs, develop procedures to 

coordinate their examinations with OCIE and include provisions to review for

compliance with conditions and representations in exemptive orders and noaction letters on a risk basis; (4) the Divisions of Investment Management and

Trading and Markets should include compliance with the conditions and 

representations in significant exemptive orders and/or no-action letters issued to 

regulated entities as risk considerations in connection with their monitoring 

efforts; and (5) OCIE should include compliance with conditions and 

representation in significant exemptive orders and no-action letters issued to 

regulated entities as risk considerations in connection with its compliance efforts.
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Report No. 482

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TABLE OF CONTENTS

Executive Summary..............................................................................................

Table of Contents .................................................................................................

Background and Objective ............................................................................

Background ...............................................................................................

Objective ....................................................................................................

Findings and Recommendations..................................................................

Finding 1: The SEC’s Divisions That Issue Exemptive Orders and NoAction Letters Do Not Have a Coordinated Process for Ensuring 

Adherence to the Conditions and Representations Contained Therein......

Recommendation 1...............................................................

Finding 2: Data on Compliance With the Conditions and Representations

in Exemptive Orders and No-Action Letters Are Not Effectively Captured, 

Tracked, and Analyzed ..............................................................................

Recommendation 2 ...............................................................

Finding 3: The Organizational Structure of the Regulatory Programs 

Separates the Issuance of Exemptive and No-Action Relief From

Compliance Monitoring ..............................................................................

Recommendation 3 ...............................................................

Finding 4: Exemptive and No-Action Relief Are Not Considered Risk 

Factors in the Selection of Firms for OCIE Examinations ..........................

Recommendation 4 ...............................................................

Recommendation 5...............................................................

Appendices

Appendix I: Abbreviations/Acronyms. .....................................

Appendix II: Scope and Methodology.....................................

Appendix III: Criteria...............................................................

Appendix IV: List of Recommendations .................................

Appendix V: Management’s Comments .................................

Appendix VI: OIG Response to Management’s Comments....

...................

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....... ix

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Background and Objective

Background 

Exemptive Orders

The U.S. Securities and Exchange Commission’s (SEC or Commission) general 

exemptive authority is found in several different statutes administered by the 

SEC. Section 28 of the Securities Act of 1933 (Securities Act), Sections 12(h) 

and 36 of the Securities Exchange Act of 1934 (Exchange Act), Section 6(c) of 

the Investment Company Act of 1940 (Investment Company Act), and Section 

206A of the Investment Advisers Act of 1940 (Advisers Act) all provide, using 

similar wording, for exemptions of persons, securities, or transactions from 

provisions of law, rules, or regulations. 

Section 28 of the Securities Act provides that “[t]he Commission, by rule or 

regulation, may conditionally or unconditionally exempt any person, security, or 

transaction, or any class of persons, securities, or transactions, from any 

provision or provisions of this title or of any rule or regulation issued under this 

title, to the extent that such exemption is necessary or appropriate in the public 

interest, and is consistent with the protection of investors.”3 

Section 12(h) of the Exchange Act states that “[t]he Commission may by rules 

and regulations, or upon application of an interested person, by order, after 

notice and opportunity for hearing, exempt in whole or in part any issuer or class 

of issuers from the provisions of subsection (g) of this section or from section 13, 

14, or 15(d), or may exempt from section 16 any officer, director or beneficial 

owner of securities of any issuer, any security of which is required to be 

registered pursuant to subsection (g) hereof, upon such terms and conditions 

and for such period as it deems necessary or appropriate, if the Commission 

finds, by reason of the number of public investors, amount of trading interest in 

the securities, the nature and extent of the activities of the issuer, income or 

assets of the issuer, or otherwise, that such action is not inconsistent with the 

public interest or the protection of investors.”

Section 36 of the Exchange Act states that “the Commission, by rule, regulation, 

or order, may conditionally or unconditionally exempt any person, security, or 

transaction, or any class or classes of persons, securities, or transactions, from

any provision or provisions of this title or of any rule or regulation thereunder, to 

the extent that such exemption is necessary or appropriate in the public interest, 

and is consistent with the protection of investors.” 

 

3 Unlike the other statutes referenced, the Securities Act does not provide authority for exemptions through 

orders, but only by rule or regulation. 
Oversight and Compliance—Exemptive Orders and No-Action Letters June 29, 2011

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Page 2 

Section 6(c) of the Investment Company Act states that “[t]he Commission, by 

rules and regulations upon its own motion, or by order upon application, may 

conditionally or unconditionally exempt any person, security, or transaction, or 

any class or classes of persons, securities, or transactions, from any provision or 

provisions of this title or of any rule or regulation thereunder, if and to the extent 

that such exemption is necessary and appropriate in the public interest and 

consistent with the protection of investors and the purposes fairly intended by the 

policy and provisions of this title.” 

Section 206A of the Advisers Act provides that “[t]he Commission, by rules and 

regulations, upon its own motion, or by order upon application, may conditionally 

or unconditionally exempt any person or transaction, or any class or classes of 

persons, or transactions, from any provision or provisions of this title or of any 

rule or regulation thereunder, if and to the extent that such exemption is 

necessary or appropriate in the public interest and consistent with the protection 

of investors and the purposes fairly intended by the policy and provisions of this 

title.” 

In addition, Section 304(d) of the Trust Indenture Act of 1939 provides that “[t]he 

Commission may, by rules or regulations upon its own motion, or by order on 

application by an interested person, exempt conditionally or unconditionally any 

person, registration statement, indenture, security or transaction, or any class or 

classes of persons, registration statements, indentures, securities, or 

transactions, from any one or more of the provisions of this title, if and to the 

extent that such exemption is necessary or appropriate in the public interest and 

consistent with the protection of investors and the purposes fairly intended by this 

title.” 

During hearings before a subcommittee of the U.S. House of Representatives

Committee on Interstate and Foreign Commerce on H.R. 10065, a bill to provide 

for the regulation of investment companies and investment advisers, an SEC

counsel told Congress that the proposed Section 6(c) of the Investment 

Company Act “empowers the Commission to exempt any person or transaction if 

it is not inconsistent with the purpose of the title.”4

 At Senate subcommittee 

hearings on the same topic, the SEC counsel further explained the rationale 

behind the Section 6(c) exemptive provision by stating, in part, “You cannot 

possibly anticipate a transaction which you feel should not come within any 

specific provision of this bill, and you cannot possibly anticipate any person who 

may or may not come within the specific provisions of this bill. . . . If conditions 

exist or arise which manifestly are not within the legislative intent of this 

legislation, then the Commission should be in a position to exempt those in that 

 

4 Statement of David Schenker, Chief Counsel, Investment Trust Study, Securities and Exchange 

Commission, at the Hearings Before a Subcommittee of the Committee on Interstate and Foreign 

Commerce, House of Representatives, on H.R. 10065 (June 13-14, 1940), at 106. 
Oversight and Compliance—Exemptive Orders and No-Action Letters June 29, 2011

Report No. 482

Page 3 

situation, and the industry should not be required to go to Congress to get a 

statutory enactment to meet that specific situation.”5

 

The legislative history of the Investment Company Act Amendments of 1970 

explained that proposed Section 206A of the Advisers Act “would be the 

counterpart of [S]ection 6(c) of the Investment Company Act, which gives the 

Commission broad power to exempt any person, transaction, or security from 

any provision of that statute. The flexibility which this amendment would 

introduce into the administration of the Advisers Act is appropriate in view of the 

broader coverage provided for by this bill.”6 With respect to Section 28 of the 

Securities Act, the exemption was added to allow “the Commission enhanced 

flexibility to more easily adopt new approaches to registration, disclosure, and 

related issues . . . . The Committee [on Commerce of the House of 

Representatives] expects that the Commission will use this authority to promote 

efficiency, competition and capital formation in the marketplace, consistent with 

the public interest and investor protection.”7

 In addition, Section 36 was added to 

the Exchange Act to “promote efficiency, competition and capital formation in the 

marketplace, consistent with the public interest and investor protection.”8 

The Commission, acting by order, issues exemptions from statutory provisions 

and Commission rules upon its own motion or pursuant to applications from 

market participants. In some cases, these orders are issued by the staff acting 

pursuant to delegated authority. The Division of Investment Management (IM) 

provides exemptive relief under the Investment Company Act and the Advisers 

Act to regulated entities, including investment companies and investment 

advisers. The Division of Trading and Markets (TM) provides exemptive relief 

pursuant to the Exchange Act to entities, including regulated entities such as 

broker-dealers and exchanges, as well as for certain market activities. The 

Division of Corporation Finance (CF) provides exemptive relief under the 

securities registration and reporting sections of the Exchange Act to companies 

with outstanding securities that may otherwise be subject to such sections, which 

could include certain regulated entities. These three divisions may coordinate on 

exemptive relief regarding cross-cutting issues—for example, auction rate 

securities.9

 Assessment of compliance by regulated entities with the conditions 

and representations in exemptive orders and no-action letters10 is conducted 

 

5 Further Statement of David Schenker, Counsel for the Investment Trust Study, Securities and Exchange 

Commission, at the Hearings of the Subcommittee of the Committee on Banking and Currency, United 

States Senate on S. 3580 (Apr. 2-5 and 8-10, 1940), at 197. 6 Report of the Committee on Banking and Currency, United States Senate, to Accompany S. 3724 (July 1, 

1968) at 45.

7 Report No. 104-622 of the House of Representatives Committee on Commerce, on the Securities 

Amendments of 1996 (June 17, 1996). 8 Id. 9 See, e.g., Responses of the Office of Mergers and Acquisitions, Division of Corporation Finance, the 

Division of Trading and Markets and the Division of Investment Management, Auction Rate Securities -- 

Global Exemptive Relief (Sep. 22, 2008). 10 See pp. 7 to 13 below for a discussion of no-action letters.
Oversight and Compliance—Exemptive Orders and No-Action Letters June 29, 2011

Report No. 482

Page 4 

primarily by the Office of Compliance Inspections and Examinations (OCIE) as 

part of its inspection and examination activities. 

However, exemptive relief was not intended to provide unrestricted or unlimited 

relief from securities laws and rules. For example, the Commission noted the 

following in a July 15, 1960, Formal Opinion regarding the general exemptive 

authority under the Investment Company Act: “[T]he exceptional power under 

Section 6(c) to free any person from any or all provisions of the [Investment 

Company] Act is one which must be exercised with circumspection and with full 

regard to the public interest and the purposes of the [Investment Company] Act . 

. . .”

11 According to the SEC’s website, in order to provide exemptive relief under 

Section 36 of the Exchange Act, “the Commission must determine that the 

exemption is necessary or appropriate in the public interest and is consistent with 

the protection of investors.”

12 While the Commission may provide unconditional 

exemptive relief, the exemptive relief granted by the Commission typically 

requires compliance with certain conditions. If the SEC grants an application for 

an exemption that contains conditions, the requestor must adhere to the 

conditions of the exemptive order issued by the Commission or a Division acting 

pursuant to delegated authority in order for the exemption to have any effect. 

A 2005 staff report to the Commission described the role of conditions in 

exemptive relief. According to the IM report, 

Congress granted broad authority to the Commission to provide 

exemptions, conditionally or unconditionally, from the [Investment 

Company] Act, when the exemptions are in the public interest and 

consistent with the protection of investors and the purposes of the 

[Investment Company] Act. Since 1940, the Commission has 

adopted a variety of exemptive rules that permit otherwise 

prohibited transactions, but only under certain conditions . . . that 

help to deter overreaching by fund managers and protect the 

interests of fund investors. 

***

The exemptive rules permit certain activities only under conditions 

that are designed to help ensure that funds and their investors are 

adequately protected from the risks posed by the conflicts of 

interest. Some of the conditions that the Commission has included 

as a part of its exemptive orders and rules include [Independent 

Legal Counsel, Independent Bidding Process, Separate Advisory 

 

11 In re The Great American Life Underwriters, Inc., File No. 811-423 (July 15, 1960) at 5 (footnote omitted). 12 “Exchange Act Exemptive Applications,” www.sec.gov/rules/exempt.shtml.
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Report No. 482

Page 5 

and Broker-Dealer Operations, Limits on Control and Audit 

Reports].13

Exemptive orders allow entities to engage in transactions that would otherwise 

be prohibited by the provisions from which relief was requested. Noncompliance 

with the conditions of an exemptive order negates the ability of the recipient to 

rely on the exemption, and may result in a violation of the applicable securities 

laws or regulations. According to senior management staff in IM, CF, TM, and 

OCIE, noncompliance with the conditions of exemptive orders renders the order 

inapplicable to the transaction for which the relief was requested, and the order

will be treated as if it did not exist. 

The following are examples of exemptive orders, including the conditions thereto, 

that were issued by the Commission, or a Division pursuant to delegated 

authority: 

Distributions of Long-Term Capital Gains by Closed-End 

Investment Companies

An exemptive order was requested “to permit a registered closedend investment company to make periodic distributions of long-term 

capital gains with respect to its common shares as often as monthly 

in any one taxable year, and as frequently as distributions are 

specified by or in accordance with the terms of its preferred 

shares.”14 The relief was required because “Section 19(b) of the 

[Investment Company] Act generally makes it unlawful for any 

registered investment company to make long-term capital gains 

distributions more than once every twelve months.”15 The applicant 

agreed that the requested relief would be subject to a number of 

conditions, including review and reporting by the fund’s Chief 

Compliance Officer as to whether the fund and its investment 

adviser had complied with the conditions of the order; disclosures 

to fund shareholders regarding distributions on a per share basis

and other information; and certain disclosures to shareholders, 

prospective shareholders, and third parties.

16 

Subadvisory Agreements Without Shareholder Approval

A series of funds requested an exemption from Section 15(a) of the 

Investment Company Act and Rule 18f-2 thereunder to be 

 

13 Staff Report to the Securities and Exchange Commission, Exemptive Rule Amendments of 2004: The 

Independent Chair Condition (April 2005), pp. 2, 13-14 (footnote omitted). 14 Investment Company Act Release No. 28938; Evergreen Income Advantage Fund et al.; Notice of 

Application (Sep. 30, 2009), at 1.

15 Id. at 5. 16 Id. at 11-18.
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Page 6 

permitted to enter into and materially amend subadvisory 

agreements without shareholder approval and for relief from certain 

disclosure requirements.17 According to Section 15(a) of the 

Investment Company Act, “it is unlawful for any person to act as an 

investment adviser to a registered investment company except 

pursuant to a written contract that has been approved by a majority 

vote of the company’s outstanding voting securities. Rule 18f-2 

under the Act provides that each series or class of stock in a series 

investment company affected by a matter must approve that matter 

if the Act requires shareholder approval.”

18 

The conditions agreed to by the applicants included, but were not 

limited to, the following: 

• The operation of a fund in the manner described in the 

application will be approved by a majority of the fund’s 

outstanding voting securities before a fund may rely on the 

order requested in the application, and the prospectus for 

each fund will disclose the existence, substance, and effect 

of any order granted pursuant to the application. 

• The affected fund’s shareholders will be furnished all 

information about the new subadviser that would be included 

in a proxy statement within 90 days after hiring a new 

subadviser, except as modified to permit aggregate fee 

disclosure. 

• The adviser will not enter into a subadvisory agreement with 

any affiliated subadviser without approval of the agreement, 

including the compensation to be paid, by the shareholders 

of the applicable fund.

• At least a majority of the board will be independent board 

members, and nomination of new or additional independent 

board members will be placed within the discretion of thenexisting board members. 

• Each fund will disclose the aggregate fee disclosure in its 

registration statement.19 

Nationally Recognized Statistical Rating Organization 

Conflicts of Interest 

The Commission, on May 19, 2010, “conditionally exempted, with 

respect to certain credit ratings and until December 2, 2010, 

nationally recognized statistical rating organizations (‘NRSROs’) 

 

17 Investment Company Act Release No. 28808; GE Funds et al.; Notice of Application (July 2, 2009), at 1. 18 Id. at 5. 19 Id. at 7-12.
Oversight and Compliance—Exemptive Orders and No-Action Letters June 29, 2011

Report No. 482

Page 7 

from certain requirements in Rule 17g-5(a)(3) under the [Exchange 

Act] . . . .20 “The Commission [then extended] the temporary 

conditional exemption exempting NRSROs from complying with 

Rule 17g-5(a)(3) with respect to rating covered transactions until 

December 2, 2011.”21 

According to the Order extending the exemption, “Paragraph (a) of 

Rule 17g-5 prohibits an NRSRO from issuing or maintaining a 

credit rating if it is subject to the conflicts of interest identified in 

paragraph (b) of Rule 17g-5 unless the NRSRO has . . . disclosed 

the type of conflict of interest in Exhibit 6 to Form NRSRO in 

accordance with Section 15E(a)(1)(B)(vi) of the Exchange Act and 

Rule 17g-1. . . and . . . established and is maintaining and 

enforcing written policies and procedures to address and manage 

conflicts of interest in accordance with Section 15E(h) of the 

Exchange Act[].”

22 In December 2009, the Commission adopted 

Rule 17g-5(a)(3), which “requires an NRSRO that is hired by an 

arranger to determine an initial credit rating for a structured finance 

product to take certain steps designed to allow an NRSRO that is 

not hired by the arranger to nonetheless determine an initial credit 

rating—and subsequently monitor that credit rating—for the 

structured finance product.”

23 

The Commission extended until December 2, 2011, the exemption 

from the requirements of Rule 17g-5(a)(3) if the following conditions 

exist: “(1) The issuer of the security or money market instrument is 

not a U.S. person . . . ; and (2) The [NRSRO] has a reasonable 

basis to conclude that the structured finance product will be offered 

and sold upon issuance, and that any arranger linked to the 

structured finance product will effect transactions of the structured 

finance product after issuance, only in transactions that occur 

outside the U.S.”24

No-Action Letters

In some instances, instead of exemptive relief from the provisions of the 

securities laws, a company will request assurances, known as “no-action” letters, 

from Commission staff that it will not recommend enforcement action for the 

company’s proposed activity. No-action letters expressly represent only a 

 

20 Release No. 34-63363, Order Extending Temporary Condition Exemption for Nationally Recognized 

Statistical Rating Organizations From Requirements of Rule 17g-5 Under the Securities Exchange Act of 

1934 and Request for Comment (Nov. 23, 2010), at 1 (footnote omitted).

21 Id. 22 Id. at 2 (footnotes omitted). 23 Id. (footnote omitted). 24 Id. at 8.
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position by the staff as to whether it would recommend enforcement action to the 

Commission based on the facts and circumstances described in the incoming 

letter(s), and the letters expressly do not represent legal conclusions or opinions. 

No-action letters are intended to assist industry in complying with the securities 

laws by providing the Divisions’ staff positions on contemplated transactions. 

The Commission staff provide no-action letters under the Commission’s rules 

pertaining to informal procedures. Rule 202.1(d) provides, in part, as follows:, 

The informal procedures of the Commission are largely concerned 

with the rendering of advice and assistance by the Commission’s 

staff to members of the public dealing with the Commission. While 

opinions expressed by members of the staff do not constitute an 

official expression of the Commission’s views, they represent the 

views of persons who are continuously working with the provisions 

of the statute involved. And any statement by the director, 

associate director, assistant director, chief accountant, chief 

counsel, or chief financial analyst of a division can be relied upon 

as representing the views of that division.

25

The Commission is not bound by staff no-action letters, and the letters are not 

rulings of the Commission or its staff on questions of law or fact.26 Also, “such 

letters are not intended to affect the rights of private persons.”27 According to a 

former SEC Chairman, although the no-action letter has “no binding effect and is 

of limited legal significance, [the Commission has] found that the bar regards it as 

an important and useful device. In substance, the ‘no-action’ letter is a statement 

by the staff that, on the facts presented to them, they will not recommend that the 

Commission take any action if the attorney proceeds on the basis of his opinion 

that the statutes do not prohibit his proposal.”28

According to a December 1977 Division of Market Regulation (now TM) 

memorandum,

An exemption from a Rule is [sic] generally confers greater benefits 

on the recipient than a no-action position under the Rule though the 

difference in benefit may be more apparent than real. An 

exemption is granted pursuant to delegated authority and precludes 

the Commission from bringing any action under the Rule, assuming 

that the facts on which the exemption is granted are accurate and 

 

25 17 C.F.R. § 202.1(d). 26 Commission Release No. 33-5691, No-Action and Interpretive Letters—Monthly Publication of List of 

Significant Letters Issued by the Division of Corporation Finance (Mar. 17, 1976), 41 Fed. Reg. 13682 (Mar. 

31, 1976).

27 Id. 28 Address by Edward N. Gadsby, Chairman, Securities and Exchange Commission, to the Federal Bar 

Association, The Approach of the Practitioner to the S.E.C. (Sep. 17, 1960), p. 3.
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complete. An exemption is also understood to preclude, at least as 

a practical matter, civil suits by private litigants. A no-action 

position precludes only this Division from recommending action

under the Rule though it is very unlikely, as a practical matter, that 

the Commission would bring an action in a situation where this 

Division had taken a no-action position.29

In written requests to the Divisions’ staff for no-action relief, applicants are to 

include 

(1) information on the proposed activities, 

(2) analysis of the particular facts and circumstances involved, 

(3) discussion of the applicable laws and rules, and 

(4) representations regarding steps they will take in connection with the 

proposed transaction, such as disclosures or additional processes. 

A Division staff member, usually an attorney, reviews the request and, if the 

request is granted, responds to the applicant, indicating that the staff will not 

recommend enforcement action to the Commission based on the facts and 

representations made in the request. 

The Division staff clearly state in these letters that no-action relief was provided 

solely based on the facts and representations presented and that any different 

facts or conditions might require another conclusion. Also, the Division staff state 

that the no-action letter refers to the staff’s view on enforcement action only and 

does not express any legal conclusions on the question presented. For example, 

a CF no-action letter included the following statement: “This position is based on 

the representations made to the Division in your letter. Any different facts or 

conditions might require the Division to reach a different conclusion. Further, this 

response expresses the Division's position on enforcement action only and does 

not express any legal conclusion on the question presented.”30

Initially, the Commission did not make no-action letters available to the public. 

According to a 1968 Commission release, “[i]n the past, neither interpretive 

letters, no-action letters, nor the inquiries upon which they have been based have 

generally been made available to the public. In part, this policy has been based 

upon a belief that a member of the public should be able to obtain the advice of 

the Commission’s staff without fear that information provided to the staff for that 

purpose might be made public in a manner that might adversely affect his lawful 

business activities or invade his personal privacy.”31 The Commission 

 

29 Memorandum to Market Structure and Trading Practices Attorneys, December 9, 1977, Staff Meeting 

Guidelines for Granting Exemptions and Taking No-Action Positions (Dec. 8, 1977), p. 6. 30 Division of Corporation Finance No-Action Letter, ViewSonic Corporation (Mar. 14, 2008). 31 Release No. 33-4924, Request for Comments on Whether Staff Interpretative and No-Action Letters 

Should Be Made Available to the Public (Sep. 20, 1968), at 3. 
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reconsidered this position in a request for comments on making no-action letters 

publicly available, stating the following:

On the other hand, it has been stated that it would seem 

anomalous that an agency which embraces disclosure as a 

fundamental philosophy should adopt a flat non-disclosure policy 

with respect to administrative determinations it generates . . . . 

[P]ractitioners might find these letters helpful . . . . Further 

advantage of public disclosure may result from the fact that some 

persons may be less than candid in purporting to provide the 

complete and accurate information requested by the staff; if a 

procedure were adopted by which all requests for no-action and 

interpretative letters were made public in the form in which 

received, it is argued that this would be less likely to occur. 

Another possible advantage of public disclosure might be that of 

discouraging unnecessary requests. The Commission’s staff has 

been faced with a growing volume of requests and has found it 

increasingly difficult to devote to each the degree of analysis it 

deserves. . . . [E]ven full public disclosure may not be considered 

too high a price to pay for the expert views of the staff on novel 

questions of law or on the application of existing principles to novel 

or unusually complex factual situations.”32

The Commission has made no-action letters available to the public since 1970. 

The following are examples of no-action letters issued by staff of the Divisions:

Investment Advisers’ Marketing Materials

IM staff responded to a request for assurances that it would not 

recommend enforcement action to the Commission under Section 

206(4) of the Advisers Act and Rule 206(4)-1(a)(2) thereunder

against the requester’s investment adviser subsidiaries if they 

“distribute certain marketing materials to prospective clients and 

current clients who are not invested in the investment strategy to 

which the marketing materials relate . . . that show no fewer than 

five holdings that contributed most positively to a representative 

account’s performance and an equal number of holdings that 

contributed most negatively to the representative account’s 

performance.”33 

The staff noted that “Section 206(4) of the Advisers Act prohibits 

investment advisers from engaging in any act, practice, or course of 

32 Id. at 3-4 (quotations and footnote omitted). 33 Division of Investment Management No-Action Letter, The TCW Group, Inc. (Nov. 7, 2008), p. 1.

 
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business that the Commission, by rule, defines as fraudulent, 

deceptive or manipulative. Rule 206(4)-1(a)(2) under the Advisers 

Act generally provides that it is a fraudulent, deceptive, or 

manipulative act, practice, or course of business for any investment 

adviser to publish, circulate, or distribute any advertisement ‘which 

refers, directly or indirectly, to past specific recommendations of 

such investment adviser which were or would have been profitable 

to any person . . . .’ Rule 206(4)-1(a)(2), however, does not prohibit 

an advertisement ‘which sets out or offers to furnish a list of all 

recommendations made by such investment adviser’ during the 

preceding year, provided that the advertisement or the list contains 

certain specific disclosures about the recommendations.”34 

The IM staff granted the requested no-action relief based upon the

applicant’s representations, which included the following: 

• The calculation “will take into account consistently the 

weighting of every holding in the representative account that 

contributed to the account’s performance” during the 

measurement period, and the charts will consistently reflect

the results of the calculation. 

• The charts’ presentation of information and the number of 

holdings will be consistent from measurement period to 

measurement period. 

• The charts will show no fewer than 10 holdings, including an 

equal number of positive and negative holdings.

35

Reporting of Beneficial Ownership Information

In this no-action letter, CF staff stated that CF would not 

recommend enforcement action to the Commission if the requester 

and certain of its entities (Qualifying Entities) “report beneficial 

ownership on Schedule 13G under those circumstances in which 

they could so report if they were entities of the type identified in 

Rule 13d-1(b)(1)(ii) under the [Exchange Act].”36

The staff noted that the applicants made representations “regarding 

the comparability of the relevant foreign laws that govern [the 

requester] and the Qualifying Entities to the U.S. laws governing 

entities of the type listed in Rule 13d-1(b)(1)(ii).”37 The staff also 

 

34 Id. at 2 (footnote omitted). 35 Id. at 4. 36 Division of Corporation Finance No-Action Letter, Orbis Group and certain of its Qualifying Entities (July 

16, 2008). 37 Id. 
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noted the requester’s “undertaking to furnish upon request the 

information that would be required by Schedule 13D.”38

Broker-Dealer Confirmations

TM staff responded to a request for assurance that TM staff “would 

not recommend enforcement action under Rules 17a-3(a)(8) and 

17a-4 of the [Exchange Act] against [the requester’s] broker-dealer 

customers that depend on [the requester] to transmit confirmations

of purchases and sales of securities (the ‘Broker-Dealer 

Participants’), if these Broker-Dealer Participants rely on [the 

requester] to maintain and preserve such confirmations under 

Exchange Act Rule 17a-4(i) . . . .39 According to the no-action 

letter, “Broker-Dealer Participants currently transmit to [the 

requester] all of the disclosures included on each electronic 

confirmation . . . on a transaction-by-transaction basis. Under [a 

previous no-action letter], Broker-Dealer Participants will provide 

[the requester] with the types of disclosures that the Broker-Dealer 

Participant customarily includes on the back of a paper 

confirmation, and when an electronically-delivered . . . confirmation 

is sent to a customer, [the requester] will make the applicable 

disclosures available to the customer via a URL link stamped on 

the confirmation. Thus, when [the requester] delivers an electronic 

confirmation . . . , a Broker-Dealer Participant will no longer need to 

transmit to [the requester] the disclosures customarily provided on 

the back of a paper confirmation for each confirmation [the 

requester] issues, because the Broker-Dealer Participant will have 

previously transmitted this information to [the requester].”40

The staff noted that “[u]nder Rule 17a-4(i), the Broker-Dealer 

Participants will rely on [the requester] to satisfy the requirements 

of Rule 17a-3(a)(8) to make and keep current a complete copy of 

each . . . confirmation delivered to a customer, as well as to 

preserve such confirmations under Rule 17a-4(b)(1).”41 The staff 

further noted that the requester “will preserve the confirmations as 

is required by Rule 17a-4; and that [the requester] and each 

Broker-Dealer Participant that engages [the requester] as a third 

party recordkeeper as described in [the incoming] letter will enter 

into an agreement setting forth the obligations and representations 

of each party under the arrangement, consistent with the 

representations contained in [the incoming] letter.”

42

 

38 Id.

 The staff then 

39 Division of Trading and Markets No-Action Letter, Omgeo LLC (Mar. 19, 2009), at 1. 40 Id. at 2. 41 Id. 42 Id.
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stated, “We also note that each Broker-Dealer Participant is 

required by Form BD to promptly notify regulators of any third party 

books and records maintenance requirements. Finally, we note 

that [the requester] has made the representations and agreements 

required by Rule 17a-4(i).”43

Monitoring Conditions of Exemptive Orders and 

Representations in No-Action Letters

OCIE conducts examinations of firms that are registered with the Commission, 

including registered broker-dealers, transfer agents, clearing agencies, 

investment advisers, and investment companies (regulated entities). During 

examinations, OCIE staff seek to determine whether an entity’s activities are 

conducted in accordance with the federal securities laws. According to OCIE, it 

has been a longstanding practice for examiners to review, as part of preexamination work, exemptive orders and no-action letters that have been issued 

to the registrant being examined. During an examination, examiners may review 

for compliance with the conditions of any applicable exemptive orders and noaction letters if they fall within the scope of the examination. OCIE indicated that 

an examination report or deficiency letter will include the results of OCIE’s review 

of compliance with exemptive orders or no-action letters if potential violations of 

the law are found. 

TM’s Office of Market Operations has on occasion reviewed compliance with 

information technology-related conditions of certain temporary exemptive orders, 

but does not engage in any systematic monitoring of such orders. 

The primary record of exemptive orders and no-action letters is contained on the 

Commission’s website at www.sec.gov. On the website, each Division includes 

its exemptive orders and no-action letters. TM lists such orders and letters by

subject category, chronologically, and alphabetically by entity. The Divisions also 

maintain various internal systems to track the processing of these orders and 

letters. 

Objective 

Objective. This review was conducted as part of our annual audit plan. The 

objective was to assess the Commission’s processes for ensuring adherence to 

the conditions under which exemptive orders and no-action letters are granted to 

regulated entities.

 

43 Id. 
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Findings and Recommendations 

Finding 1: The SEC’s Divisions That Issue 

Exemptive Orders and No-Action Letters Do Not 

Have a Coordinated Process for Ensuring

Adherence to the Conditions and Representations 

Contained Therein

TM, IM and CF indicated that they generally do not 

conduct any monitoring for compliance with the 

conditions and representations in the exemptive 

orders and no-action letters they issue. TM and IM 

believe that it is the responsibility of OCIE to conduct 

inspections and examinations and rely on OCIE’s 

results. CF indicated that it reviews filings submitted 

by companies to the Commission, but it does not 

have the authority to conduct examinations of 

companies to review compliance with no-action letters 

and exemptive orders. TM’s Office of Market 

Operations has on occasion reviewed compliance 

with information technology-related conditions of 

certain temporary exemptive orders, but does not 

engage in any systematic monitoring of such orders. 

ff in IM and CF indicated that they do not conduct any monitoring for 

mpliance with the conditions and representations in no-action letters and 

emptive orders. IM staff stated that IM did not conduct regular reviews to 

termine whether applicants complied with the conditions of the exemptions it 

s granted. IM staff indicated that, in their view, OCIE’s on-site examinations 

d inspections are the primary means to monitor regulated entities’ compliance 

h exemptive orders and no-action letters. CF reviews and issues comments to 

prove disclosures in filings by publicly held companies (e.g., initial public 

ering registrations, annual and quarterly reports, tender offer filings, and 

rgers and acquisition filings). These companies can include both 

nregulated entities, such as issuers of securities or Exchange Act registrants, 

d certain regulated entities. CF staff noted that CF does not have examination 

thority and does not audit for compliance because exemptive orders and notion letters are not applicable if the conditions or representations in the orders 

no-action letters have not been adhered to, i.e., they are “self-executing.” CF 

ff stated that it is in the applicant’s interest to comply with the conditions or 

resentations in exemptive orders or no-action letters because of the 

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Oversight and Compliance—Exemptive Orders and No-Action Letters June 29, 2011

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investment made in legal assistance and in negotiating the relief and the 

conditions during the processing of the application

TM staff stated that TM generally does not review for compliance with exemptive 

orders and no-action letters. TM staff indicated that the responsibility for 

compliance with the conditions and representations in exemptive orders and noaction letters is given to the entities themselves. TM staff noted that no-action

letters contain a statement that if there is a material change in the facts and 

circumstances related to the relief sought, the letter no longer applies. However, 

TM’s Office of Market Operations has on occasion conducted reviews of the 

information technology-related conditions of the temporary exemptive relief 

provided to certain clearing agencies to allow them to serve as central 

counterparties for credit default swaps, although it does not engage in any 

systematic monitoring of such orders. TM staff indicated that this was a unique 

situation because these inspections were required as one of the conditions of the

exemptive relief that was granted. TM staff also indicated that, in their view, 

OCIE examinations and inspections are the primary means to monitor 

compliance with exemptive orders and no-action letters. 

While there is some monitoring of certain matters involving exemptive and noaction relief (e.g., central counterparty clearing of credit default swaps, securities 

lending, fund distributions of long-term capital gains), the processes for such 

monitoring are uneven and do not appear to be coordinated. The following is an 

example of exemptive and no-action relief provided by the Divisions and 

monitoring efforts. 

Auction Rate Securities. In 2008, TM, CF, and IM granted exemptive and noaction relief to a number of firms to allow them to make offers to buy back auction 

rate securities (i.e., bonds for which the interest rate is reset on a recurring basis)

as agreed to in an enforcement settlement. These firms agreed to buy back 

these securities, which had been marketed as highly liquid and safe investments, 

from customers such as individual investors, small businesses, and charities 

after the market for the securities collapsed, leaving the customers with illiquid 

securities for which there was no market demand.44 To purchase these 

securities, the firms needed relief from a number of requirements, including the 

tender offer, beneficial ownership, and filing requirements of the Exchange Act 

and the Investment Company Act. The conditions for this relief included 

purchasing the securities at no less than par value plus dividends or interest, 

maintaining the appropriate information on the buybacks, and making that

information available to TM, and filing certain forms.45 

 

44 Press Release 2008-81, SEC Enforcement Division Announces Preliminary Settlement With Merrill Lynch 

to Help Auction Rate Securities Investors (Aug. 22, 2008). 45 Responses of the Office of Mergers and Acquisitions, Division of Corporation Finance, the Division of 

Trading and Markets and the Division of Investment Management, Auction Rate Securities—Global 

Exemptive Relief (Sept. 22, 2008).
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TM and CF staff indicated that TM and CF performed little, if any, monitoring of 

compliance with the conditions and representations relating to the relief granted. 

IM staff stated that although IM monitored activity in the industry regarding the 

repurchases of auction rate securities, it did not monitor compliance with the 

conditions and representations related to the exemptive and no-action relief. TM 

staff indicated that TM did not perform regular reviews to determine whether the 

conditions and representations related to the auction rate securities exemptive 

and no-action relief were being complied with. CF also did not perform regular 

reviews to determine whether the conditions and representations related to the 

exemptive and no-action relief were being complied with. CF staff indicated that 

CF was trying to help resolve the liquidity problem with the auction rate securities 

and that without the exemptive and no-action relief that allowed modified 

reporting, companies would have to submit hundreds of filings as they bought 

back these securities. However, CF staff indicated that CF did not have a regular 

program for reviewing the filings submitted under the modified reporting 

conditions (Schedules 13D or 13G or the ownership reports, i.e., Forms 3, 4, and 

5). IM staff indicated that IM did not perform regular reviews to determine 

whether the conditions and representations related to the exemptive and noaction relief were being complied with. However, IM stated that it did generally 

monitor the auction rate preferred securities market. 

According to the Commission’s rules, the Director of CF is responsible for 

administration of the Securities Act, the Exchange Act, and the Trust Indenture 

Act of 1939, except for matters relating to investment companies registered 

under the Investment Company Act.46 The Director of TM is responsible for 

administration of the Exchange Act “relating to the structure and operation of the 

securities markets and the prevention of manipulation in the securities 

markets.”47 The Director of IM is responsible for administration of the 

Commission’s responsibilities under the Investment Company Act and the 

Advisers Act.

48 The Director of OCIE is responsible for compliance inspections 

and examinations of regulated entities, including but not limited to exchanges, 

clearing agencies, brokers, dealers, transfer agents, investment companies, and 

investment advisers.49

After the Divisions or their staff issue exemptive orders and no-action letters to 

regulated entities, they have no consistent process to determine whether the 

conditions and representations in the orders and letters are complied with and 

rely primarily on risk-based OCIE examinations for monitoring. IM and TM staff 

indicated that they provide input into O

OCIE both formally and informally to di

examination findings. However, the Di

 

46 17 C.F.R. § 200.18. 47 17 C.F.R. § 200.19a. 48 17 C.F.R. § 200.20b. 49 17 C.F.R. § 200.19c.

CIE’s examination process, meeting with 

scuss risk, examination planning, and 

visions and OCIE do not view exemptive 
Oversight and Compliance—Exemptive Orders and No-Action Letters June 29, 2011

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orders and no-action letters per se, as potential risks because of the selfexecuting nature of the relief granted (see Finding 4). 

Overall, our review found that the Divisions focused more on processing and 

issuing exemptive orders and no-action letters than on monitoring compliance 

with the conditions and representations in their exemptive orders and no-action 

letters. We further found that the Divisions have established processes and 

guidance for the receipt and processing of applications for exemptive orders and 

requests for no-action letters, but they rely on OCIE to monitor compliance as 

part of its examinations, and have not developed any monitoring procedures. 

Moreover, except in a small number of instances, the Divisions appear to rely on 

the entity obtaining relief to comply with the conditions and representations in the 

orders and letters. However, the Divisions have provided us with no evidence 

that companies are able to monitor themselves in this regard.

As noted above, exemptive orders and no-action letters allow industry 

participants to conduct activities that, without the relief, could result in a violation 

of the securities laws and regulations and/or an enforcement referral. Also, OCIE 

provided documentation of instances of noncompliance with the conditions and 

representations in exemptive orders and no-action letters it found as a result of 

its examinations (for examples, see Finding 4). Notwithstanding the selfexecuting nature of the relief, we believe that monitoring is important to ensure 

compliance with the conditions and representations in exemptive orders and noaction letters. This can be achieved by IM and TM and, to the extent applicable, 

CF engaging in increased coordination with OCIE’s examinations of regulated 

entities’ compliance with the conditions and representations in exemptive orders 

and no-action letters. 

Recommendation 1:

The Divisions of Investment Management, Trading and Markets, and 

Corporation Finance should develop processes, including written policies and 

procedures, for coordination with the Office of Compliance Inspections and 

Examinations regarding reviewing for compliance with conditions and 

representations in exemptive orders and no-action letters issued to regulated 

entities on a risk basis. 

Management Comments. IM, TM, CF and OCIE generally concurred with 

this recommendation. See Appendix V for management’s full comments. 

OIG Analysis. We are pleased that IM, TM, CF and OCIE generally 

concurred with this recommendation.
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Finding 2: Data on Compliance With the 

Conditions and Representations in Exemptive 

Orders and No-Action Letters Are Not Effectively 

Captured, Tracked, and Analyzed

IM, TM, and CF separately maintain their own data on 

exemptive orders and no-action letters that they

process and issue, but the Divisions do not maintain 

data on compliance with the conditions and 

representations associated with those orders and 

letters. 

IM, TM, and CF enter and track data regarding processed exemptive orders and 

no-action letters in various ad hoc spreadsheets and databases. However, the 

data that we received in response to our review requests did not include any 

information on compliance with the conditions and representations in exemptive 

orders and no-action letters. For example, IM provided us with data that included

the company name, the topic of the relief or the securities law or regulation 

involved, and the dates on which the exemptive application was received and 

relief was issued, but the data did not contain any information about compliance 

with the conditions and representations in the order or letter. Similarly, CF 

provided us with a spreadsheet that included company names, types of relief, 

and dates issued, but the spreadsheet did not have any information on 

compliance with conditions or representations in exemptive orders and no-action 

letters. In addition, the Divisions make available lists of exemptive orders and 

no-action letters on the Commission’s website, by date, company name, and 

subject category, but the website contains no information about compliance with 

the conditions or representations in the orders and letters.

50 

OCIE’s database tracks information such as the company’s name, examination 

number, dates of fieldwork, examiner’s name, and actions taken as a result of an 

examination. OCIE’s system also provides the general review areas where 

deficiencies were identified (e.g., portfolio management, calculation of net asset 

value, safety of fund assets) and tracks information on violations by review area. 

OCIE also includes the results of its review of exemptive orders and no-action 

letters in its examination reports in instances where noncompliance is found, and 

provides copies of such reports to the Divisions. Further, OCIE tracks violations 

of the federal securities laws that it identifies in its inspections and examinations. 

According to OCIE, failure to comply with an exemptive order or no-action letter 

that results in a violation of the federal securities laws would be tracked as a 

 

50 The Divisions noted that Section 210(b) of the Advisers Act prohibits the Commission from publicly 

disclosing the results of any examination of any investment adviser and that, in general, the Commission 

keeps nonpublic the results of its examinations.
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violation of the specific federal securities law. However, OCIE’s systems would 

not identify the exemptive order or no-action letter at issue or the conditions or 

representations for which there was noncompliance, or provide any link between 

such order or no-action letter and the resulting violations of the federal securities 

laws. As a result, without substantial manual effort, OCIE’s database cannot be 

used to identify the exemptive orders and no-action letters for which there was 

noncompliance with the conditions and representations of the orders or no-action 

letters, or to link the noncompliance to the applicable violations of the securities 

laws and regulations.

In addition, since the Divisions and OCIE maintain their own data, they are 

separately maintaining information on the same entities. For example, if CF 

provided exemptive and/or no-action relief to an entity, CF would include the 

applicable order or letter in its database; if IM or TM provided relief to the same 

entity, IM or TM would include the entity in its database; and if OCIE conducted

an examination of that entity, OCIE would include the information regarding the 

examination in its own database. While the Divisions and OCIE occasionally 

share information pertinent to exemptive orders and no-action letters, the 

process is informal and not systematic. For example, OCIE shares its plans and 

the results of its examinations with IM and TM. Also, some no-action letters and 

exemptive orders may be developed jointly between IM, CF, and/or TM, and 

information may be shared in those instances. However, there is no systematic 

sharing or capability of sharing information, and each entity maintains its own 

database and lists that are not shared with the others. 

The only evidence we saw of the Divisions’ analysis of data on compliance with 

exemptive orders related to certain particular and individual issues. For example, 

IM analyzed the results of examinations regarding the securities lending 

practices of investment companies and, as a result, discontinued providing 

exemptive relief that would allow securities lending using an affiliated lending 

agent. IM is considering whether to resume issuing relief to engage in securities

lending activities with affiliates and, if so, under what terms and conditions. Also, 

TM staff provided information regarding the method that TM developed 

specifically to track the results of examinations of clearing agencies operating as 

central counterparties for clearing credit default swaps, including compliance with 

certain conditions of the applicable temporary exemptive orders. 

Because the Divisions do not systematically capture and analyze data on 

compliance with the conditions and representations in exemptive orders and noaction letters, we determined that the Commission is less effective than it could 

be in monitoring compliance with such conditions and representations. For 

example, the SEC cannot readily identify the regulated entities that have failed to 

comply with the terms and conditions of the exemptive and/or no-action relief that 

has been provided to them. Also, the SEC does not perform analyses, for 

example, to identify the provisions of the securities laws and rules for which 

exemptive or no-action relief is most often provided or to identify patterns of 
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noncompliance with the conditions and representations in exemptive orders or 

no-action letters, such as the investor protection conditions for which 

noncompliance is most often found. As a result, the SEC is less effective than it 

could be in monitoring compliance with the investor protection conditions of the 

relief it provides to the industry from the provisions of the securities laws and 

rules.

Furthermore, because of the manner in which the data are maintained, there is 

no single place in the SEC from which it is possible to obtain a combined list of a 

company’s exemptions and no-action relief or the results of any reviews of 

compliance with the conditions or representations in exemptive orders and noaction letters. For example, the OIG had to review separate no-action and 

interpretive letter listings for each of the Divisions that were found on the 

Commission’s public website to determine whether companies had received 

letters from more than one SEC Division. 

Recommendation 2: 

The Divisions of Investment Management, Trading and Markets, and 

Corporation Finance, in coordination with the Office of Information 

Technology and the Office of Compliance Inspections and Examinations, 

should develop and implement processes to consolidate, track, and 

analyze information regarding exemptive orders and no-action letters 

issued to regulated entities. These processes should be documented in 

written policies and procedures. 

Management Comments. IM, TM, CF and OCIE generally concurred 

with this recommendation. See Appendix V for management’s full 

comments. 

OIG Analysis. We are pleased that IM, TM, CF and OCIE generally 

concurred with this recommendation.
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Finding 3: The Organizational Structure of the 

Regulatory Programs Separates the Issuance of 

Exemptive and No-Action Relief From Compliance 

Monitoring

The SEC organizational structure separates the functions of 

issuing exemptive and no-action relief from compliance 

monitoring. IM, TM, and CF and their staffs grant exemptive 

and no-action relief. OCIE, through its inspections and 

examinations, reviews for compliance with the conditions 

and representations in exemptive orders and no-action 

letters issued to regulated entities. Consequently, the 

rulemaking Divisions do not view compliance monitoring as 

their responsibility.

The SEC’s organizational structure separates the rulemaking and examination 

functions. As previously discussed, the rulemaking functions are located in IM, 

TM, and CF. These Divisions are responsible for overseeing their respective 

areas of the securities laws and regulations and drafting and proposing rules. 

According to 17 C.F.R. § 200.20b, the Director of IM 

is responsible to the Commission for the administration of 

the Commission’s responsibilities under the [Investment 

Company Act and the Advisers Act] . . . with respect to 

matters pertaining to investment companies registered under 

the Investment Company Act . . . and pooled investment 

funds or accounts, the administration of all matters relating 

to establishing and requiring adherence to standards of 

economic and financial reporting and the administration of 

fair disclosure and related matters under the [Securities Act 

and the Exchange Act] . . . . These duties shall include 

inspections arising in connection with such administration 

but shall exclude enforcement and related activities under 

the jurisdiction of the Division of Enforcement. 

According to 17 C.F.R. § 200.19a, the Director of TM

is responsible to the Commission for the administration and 

execution of the Commission’s programs under the 

[Exchange Act] relating to the structure and operation of the 

securities markets and the prevention of manipulation in the 

securities markets. These responsibilities include oversight 
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of the national market system, the national clearance and 

settlement system, and self-regulatory organizations, such 

as the national securities exchanges, registered securities 

associations, clearing agencies, the Municipal Securities 

Rulemaking Board, and the Securities Investor Protection 

Corporation. . . . The functions involved in the regulation of 

such entities include reviewing proposed rule changes of 

self-regulatory organizations, recommending the adoption 

and amendment of Commission rules, responding to 

interpretive, exemptive, and no-action requests, and 

conducting inspections, examinations, and market 

surveillance. 

According to 17 C.F.R. § 200.18, the Director of CF

is responsible to the Commission for the administration of all 

matters (except those pertaining to investment companies 

registered under the Investment Company Act . . .) relating 

to establishing and requiring adherence to standards of 

business and financial disclosure with respect to securities 

being offered for public sale pursuant to the registration 

requirements of the Securities Act . . . or the exemptions 

therefrom . . . . 

TM does have some oversight functions that may pertain to compliance with the 

conditions and representations of exemptive orders and no-action letters. For 

example, it oversees the implementation of the Commission’s Automation 

Review Policy program regarding the Self-Regulatory Organizations’ system 

capacity and assessment, notification of system outages, annual reports on 

systems, and independent reviews.51 The Automation Review Policy program 

coordinated with OCIE in the reviews of the central counterparties for clearing 

credit default swap transactions, conducting its own limited reviews of 

compliance with the automation-related conditions of the applicable exemptive 

order, but did not conduct any systematic monitoring. TM has advised us that it 

views OCIE as being the office with the primary responsibility for monitoring 

compliance with exemptive orders and no-action letters. 

According to 17 C.F.R. § 200.19c, the Director of OCIE “is responsible for the 

compliance inspections and examinations relating to the regulation of exchanges, 

national securities associations, clearing agencies, securities information 

processors, the Municipal Securities Rulemaking Board, brokers and dealers, 

municipal securities dealers, transfer agents, investment companies, and 

investment advisers . . . .” Since OCIE inspects and examines regulated entities 

including investment companies, investment advisers, and broker dealers, 

 

51 SEC OIG, Oversight of SRO Automation, Report No. 268 (May 18, 1998).
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OCIE’s inspection and examination results are relevant to rules and requirements 

related to IM’s and TM’s programs. While IM and TM staff receive copies of 

OCIE’s examination reports, they only coordinate with OCIE on reviews of the 

implementation of certain major Commission initiatives related to exemptive 

orders, such as securities lending, NRSROs, and central counterparties for 

clearing credit default swaps. Our review found that OCIE provides little 

systematic monitoring for IM, TM, or CF, although CF staff indicated that they

receive quarterly reports from OCIE regarding compliance with the nonpublic 

offering rules. Furthermore, while IM and TM provide some input to OCIE’s 

examination program, OCIE selects its examinations based on its own risk 

assessment procedures and has its own priorities for selecting entities for 

examinations and inspections. 

Our review found that there is no formalized coordination between the SEC’s 

rulemaking and examination functions and, as a result, there is no formalized 

process for monitoring or ensuring compliance with the conditions and 

representations in exemptive orders and no-action letters. 

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 

(Dodd-Frank Act) requires IM and TM to include examiners in those Divisions

who will report to the Directors of IM and TM.

52 According to legislative history 

for this provision, the purpose of this requirement was to “provide each Division 

internally with experts in inspections and in the regulations of that Division, who 

are closely acquainted with and have access to the staff who write and interpret 

those regulations.”53

Recommendation 3: 

The Divisions of Investment Management and Trading and Markets 

should, in their plans for implementing Section 965 of the Dodd-Frank Wall 

Street Reform and Consumer Protection Act, develop procedures to 

coordinate their examinations with those conducted by the Office of 

Compliance Inspections and Examinations and, as appropriate, include

provisions for reviewing for compliance with the conditions in exemptive 

orders and representations made in no-action letters on a risk basis. 

Management Comments. IM and TM generally concurred with this 

recommendation. See Appendix V for management’s full comments. 

OIG Analysis. We are pleased that IM and TM generally concurred with 

this recommendation.

 

52 Section 965 of the Dodd-Frank Act, Pub. L. No. 111-203 (July 21, 2010) 53 Senate Report 111-176, The Restoring American Financial Stability Act of 2010, April 30, 2010, at 143.
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Finding 4: Exemptive and No-Action Relief Are 

Not Considered Risk Factors in the Selection of 

Firms for OCIE Examinations 

The staffs of the Divisions and OCIE do not view the 

granting of exemptive or no-action relief as, per se, a 

significant risk factor, although the relief allows entities to 

conduct activities that are otherwise contrary to the 

securities laws and regulations, and OCIE has often 

identified problems with entities’ compliance with the 

conditions of the relief granted. 

The OCIE and Division staff we interviewed acknowledged that noncompliance 

with the conditions and representations in exemptive orders and no-action letters 

could result in significant violations of the securities laws and/or OCIE referrals to 

the Division of Enforcement. Also, OCIE provided us with documentation of 

noncompliance with the conditions and representations in exemptive orders and 

no-action letters that it found during its examinations. Yet OCIE and the 

Divisions do not view the granting of exemptive and no-action relief, per se, as a 

potentially significant noncompliance risk.54

OCIE has documented that firms sometimes fail to comply with the conditions of 

exemptive orders and representations made in requesting no-action relief. OCIE 

has, through its examinations, identified instances where the conditions and 

representations in exemptive orders and no-action letters have not been 

followed. OCIE provided us with information on a total of 477 examination 

reports that included a discussion of whether or not firms complied with the 

conditions and representations in exemptive orders or no-action letters. Based 

on the information provided by OCIE, these 477 examinations represented 

approximately 10 percent of the 4,771 examinations completed from January 1, 

2008, through March 31, 2010. We reviewed a judgmental sample of 72 of the 

477 examination reports to determine the types of deficiencies that OCIE 

identified regarding compliance with the conditions and representations in the 

exemptive orders or no-action letters. In 44 of these 72 examination reports, we 

noted that OCIE found deficiencies in compliance with conditions and 

representations in the exemptive orders or no-action letters.

55 

 

54 Division staff stated that they believe that, generally, the more compliance-oriented market participants 

seek exemptive or no-action relief. 55 When examiners find that an entity is not in compliance with the stated conditions and representations of 

an exemptive order or no-action letter on which it purports to rely, they will consider whether the failure 

constitutes a violation of the securities laws and, if so, they will provide the entity with a deficiency letter or 

consider referring the matter to the Division of Enforcement. 
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The following are examples of noncompliance that we identified in our sample of 

OCIE examination reports:56

1. In 2005, the examination staff issued a deficiency letter, noting, 

“among other things, that Applicants had failed to adhere to 

representation number eight as outlined in the notice of the filing of 

[their] application for exemptive relief, seeking an exemption from

Section 17(a) of the Investment Company Act and an order 

permitting certain transactions under Section 17(d) of the

Investment Company Act and Rule 17d1 thereunder. During the 

current examination, the examination staff found that the Fund’s 

Board’s failure to conduct a particular review no less frequently 

than annually was inconsistent with representation one made in the 

Applicants’ request for an exemptive order.” 

2. “[T]he Funds’ analysis that they could rely on [a 1996 Exemptive] 

Order and [previous no-action letters] . . . ,without going back to the 

staff, appears to be problematic because the details of their current 

securities lending activities do not seem to comport with the details 

of the exemptive application for the 1996 Order or the [no-action 

letters]. [Footnote omitted.]” 

3. “In a no-action letter . . . , staff from [IM] took the position that the 

presentation of performance data without certain accompanying 

disclosures may be misleading and, therefore, in violation of Rule 

206(4)-1(a)(5). . . . [The examination staff] noted the performance 

information contained in the prospective client information packet 

[footnote omitted] did not contain all disclosures as suggested in 

the [referenced] no-action letter. Registrant’s omission of material 

facts and apparent failure to make clear and meaningful disclosures 

about the performance results may be inconsistent with [the noaction letter] and therefore may violate Rule 206(4)-1(a)(5).” 

4. “[T]he Registrants obtained an exemptive order [parenthetical 

omitted] that set forth conditions under which [they] could jointly 

invest in portfolio companies alongside [the adviser’s] other fund 

clients. [Footnote omitted.] Such co-investments would otherwise 

be prohibited under Section 57(a)(4) and Rule 17d-1 of the 

[Investment Company] Act. . . . It does not appear that the 

Adviser is complying with all exemptive order conditions, or with 

contract provisions pertaining to co-investments.” 

 

56 OCIE has informed us that follow-up efforts have been made with respect to the specific examples of 

noncompliance that we identified in our review and all of the noted deficiencies have been addressed and 

remedied. 
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5. “In a SEC no-action letter . . . IM took the position that registered 

investment companies may lend their portfolio securities if certain 

guidelines are met. One guideline states that lending securities 

does not relieve funds of their fiduciary duty to vote proxies and that 

funds may have to recall lent securities to satisfy that duty. . . . 

[T]he Funds[‘] failure to fulfill their proxy voting responsibilities does

not appear to conform with the . . . [no-action letter] guidance . . . . 

Furthermore, [the examination staff] found that the Funds 

participating in securities lending have not included the disclosures 

described in [a subsequent] no-action letter . . . .” 

6. “Rule 502 of Regulation D precludes an issuer or any person acting 

on an issuer’s behalf from offering or selling securities by any form 

of general solicitation or general advertising . . . . In determining 

what constitutes a general solicitation [CF] has underscored the 

existence and substance of prior relationships between the issuer

or its agent and those being solicited. . . . [T]he staff notes that the 

no-action letter guidance regarding pre-existing substantive 

relationships refers to relationships formed prior to the offer, not 

prior to the investment. [Footnote omitted.] . . . Registrant’s 

participation in a club for accredited investors and Registrant’s 

communications about specific offerings to persons previously 

unknown to Registrant do not appear to be compliant with the 

provisions of Rule 502(c) of Regulation D and the Commission’s 

interpretive guidance regarding permitted methods of solicitations. 

[Footnote omitted.]”

57

7. A Commission no-action letter “states that, ‘Transactions in blank 

check company securities by their promoters or affiliates, especially 

where they control or controlled the float of freely tradable 

securities, are not the kind of ordinary trading transactions between 

individual investors of securities already issued that Section 4(1) [of 

the Securities Act] was designed to exempt. . . . The letter further 

explains that [Commission] Rule 144 is not available as an 

exemption from registration because such transactions appear to 

be designed to distribute the securities, and any distribution would 

require registration. . . . By failing to conduct a reasonable inquiry 

pursuant to Rule 144(g)(4) to determine if [particular] transactions 

were part of a securities distribution, [the registrant] may have 

violated Section 5 of the Securities Act for facilitating [an] 

unregistered distribution.”

58

 

57 The Divisions noted that, in this instance, the regulated entity had failed to comply with Regulation D 

under the Securities Act, and that the referenced no-action letter had not created any special or additional 

conditions.

58 The Divisions pointed out that the referenced no-action letter described how to comply with Rule 144 

under the Securities Act, but did not add any special conditions.
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8. “The securities lending program for the Funds . . . enables 

participating portfolios of the Funds to generate additional income 

by lending equity or fixed income securities to the approved 

borrowers. . . . These arrangements, and similar arrangements 

administered by other predecessor affiliates, have been exempted 

from Section 17(a) and Rule 17d-1 of the [Investment Company]

Act by exemptive orders issued by the Commission. In applying for 

this exemption for [certain funds], [the Registrants’] predecessor 

firms represented that . . . [they] will reallocate or terminate loans 

as necessary to enable a Lending Fund to vote its portfolio 

securities. [Emphasis, citation, and quotations omitted.] . . . The 

Registrants’ practice of not recalling loaned securities to vote 

proxies appears to have contradicted the provisions of [the 

exemptive order] during the time period that the Registrants were 

relying on this exemptive order.” 

9. A condition of an exemptive order provided that neither a trust nor 

any fund would be advertised or marketed as open-end funds or 

mutual funds. The examination staff noted that a statement in a 

marketing presentation of the Registrant “appears to conflict with 

[this] condition of the [previous] Order” and a similar provision of a 

subsequent modified order.

10.The Registrant had filed an application with IM for an exemptive 

order under various sections of the Investment Company Act. 

“During the staff’s pre-examination work, the staff learned that the 

Exemptive Application had not yet been approved by the Division. 

The staff also learned that even though the Exemptive Application 

had not yet been approved, [the Registrant] has been operating as 

if the Exemptive Application had been approved by the SEC . . . . 

For these reasons, [the Registrant] has not made any regulatory 

filings with the SEC since 2002.”

According to the Commission’s Performance and Accountability Report for Fiscal 

Year 2010, “[t]he agency’s risk-based [national examination] program is designed 

to focus resources on those firms and practices that have the greatest potential 

risk of securities law violations that can harm investors.”59 For example, OCIE “is 

increasingly utilizing a risk-based inspection strategy that relies on a variety of 

data points to determine which entities pose the greater risk to investors.”60 This 

risk assessment process includes consideration of a number of factors. 

According to OCIE’s February 2011 overview of its examinations, “[t]he staff 

draws on numerous sources for identifying higher risk registrants and selected 

areas of focus. Sources include, among other things, tips, complaints, and 

 

59 SEC, FY 2010 Performance and Accountability Report, p. 42. 60 SEC, FY 2010 Performance and Accountability Report, p. 14.
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referrals; analysis of outlier or aberrational information provided to investors; prior 

examination findings; significant changes in registrants’ business activities; and 

registrant or registered representative disclosures regarding regulatory and other 

actions brought against them.” 61 

According to a recent OIG report on OCIE’s process for selecting regulated 

entities for review, “OCIE has developed a risk-based methodology that it uses to 

identify ‘high risk’ advisory firms and funds that are selected for routine 

examinations. Using its risk-rating system, OCIE assigns a risk level to each 

adviser based on: (1) information contained in firms’ annual registration filings 

(Form ADV); (2) assessment made during previous examinations of that entity; 

and/or (3) staff evaluations or other risk criteria.”62

This risk-rating system, however, does not include the issuance of exemptive 

orders or no-action letters as per se risk factors. These areas are excluded even 

though exemptive orders and no-action letters by their nature allow entities to 

conduct activities that do not fully comply with securities laws and rules 

(otherwise, no relief would be needed), and OCIE examination results have

shown that entities do not always comply with the conditions and representations 

in these orders and letters. Neither OCIE nor the Divisions view compliance with 

the conditions in exemptive orders or the representations in no-action letters, per 

se, as risk factors. In fact, some staff in OCIE and CF expressed the opinion that 

entities that have obtained exemptive or no-action relief for an activity present a 

reduced risk, since they have come forward and invested resources to clear their

transactions with the Commission before executing them. We also found that 

only in rare cases did OCIE focus its examination efforts on an entity’s 

compliance with conditions and representations in exemptive orders or no-action 

letters. Of the 72 examination reports we reviewed, only 10 included a stated 

purpose to review such compliance. Yet in 44 of the 72 reports we reviewed that 

discussed compliance with conditions and representations in exemptive orders or 

no-action letters, there was significant noncompliance noted. 

We are not suggesting that the Divisions and OCIE coordinate to plan reviews of 

each and every regulated entity that receives an exemptive order or no-action 

letter. However, the Divisions and OCIE could, in carrying out coordinated 

monitoring and analysis of compliance with the conditions and representations in

exemptive orders and no-action letters, identify areas of exemptive and no-action 

relief to consider as potentially significant risks. 

 

61 SEC, OCIE, Examinations by the Securities and Exchange Commission’s Office of Compliance 

Inspections and Examinations (February 2011), pp. 2-3. 62 SEC OIG, Review of the Commission’s Process for Selecting Investment Advisers and Investment 

Companies for Examinations, Report No. 470 (Nov. 19, 2009), p.15.
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Recommendation 4: 

In connection with monitoring efforts, the Divisions of Investment 

Management and Trading and Markets should include compliance with the 

conditions and representations in significant exemptive orders and/or noaction letters issued to regulated entities as risk considerations.

Management Comments. IM and TM generally concurred with this 

recommendation. See Appendix V for management’s full comments. 

OIG Analysis. We are pleased that IM and TM generally concurred with 

this recommendation.

Recommendation 5: 

In connection with its compliance efforts, the Office of Compliance 

Inspections and Examinations should include compliance with the 

conditions and representations in significant exemptive orders and/or noaction letters issued to regulated entities as risk considerations. 

Management Comments. OCIE generally concurred with this 

recommendation. See Appendix V for management’s full comments. 

OIG Analysis. We are pleased that OCIE generally concurred with this 

recommendation.
Appendix I 

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Abbreviations/Acronyms

CF Division of Corporation Finance

IM Division of Investment Management

NRSRO Nationally Recognized Statistical Rating 

Organization

OCIE Office of Compliance Inspections and 

Examinations

OIG Office of Inspector General

SEC or Commission U.S. Securities and Exchange Commission

TM Division of Trading and Markets
Appendix II

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Scope and Methodology

Scope. The scope of the review included exemptive orders and no-action letters 

that were issued by IM, TM, and CF from January 1, 2008, through March 31, 

2010. We did not review monitoring of compliance with specific statutory 

exemptions for which no specific application or request was required. Also, we 

did not assess waivers from the disqualification provisions of the securities laws 

provided as part of Enforcement settlements. To obtain information on 

compliance with conditions and representations in exemptive orders and noaction letters, we requested and reviewed OCIE examination reports issued 

between January 1, 2008, and March 31, 2010, that included reviews of 

compliance with the conditions and representations in exemptive orders and noaction letters. We also reviewed five examination reports issued in 2007 that 

OCIE provided to the OIG. We conducted our fieldwork from April 2010 to 

August 2010 and from October 2010 to February 2011.

Methodology. The review objective was to assess the Commission’s processes 

for ensuring adherence to the conditions and representations pursuant to which 

exemptive orders and no-action letters were granted to industry applicants. To 

address this objective, we interviewed IM, TM, and CF senior staff responsible 

for setting overall organization policy and procedures for monitoring compliance 

with exemptive orders and no-action letters, as well as for processing 

applications for exemptive orders and no-action letters, to identify their processes 

for ensuring adherence with the applicable conditions and representations and to 

determine their approaches to monitoring compliance after issuing orders and 

letters. We requested and reviewed documentation including laws, regulations, 

and policies and procedures that might provide guidance for monitoring 

compliance. We also interviewed staff in IM, TM, and CF to discuss monitoring 

of compliance with exemptive orders and no-action letters in general and to 

discuss specific examples. OCIE (including the field office examination 

functions) and the Automation Policy Group in TM were the only organizations 

that developed examination and review reports. We reviewed a judgmental

sample of these examination reports to identify the exemptive orders and/or noaction letter conditions and representations that were reviewed and the 

conclusions reached, and we discussed our results with the Divisions. We 

selected a judgmental sample in order to obtain examples of noncompliance with 

the conditions and representations in exemptive orders and no-action letters to 

show that entities did not always adhere to those conditions and representations. 

Because we used judgmental samples, we cannot project the results based on 

our samples to the entire universe from which the samples were taken. 

Management Controls. We reviewed controls that were considered significant 

within the context of the review objective. Controls significant to our review

objective related to those controls that the Commission designed and 
Appendix II

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implemented to ensure compliance with the conditions and representations in 

exemptive orders and no-action letters. To review these controls, we applied the 

internal control model published by the Committee of Sponsoring Organizations, 

which is also the basis for the Government Accountability Office’s Standards for 

Internal Control in the Federal Government.

63 According to the Committee of 

Sponsoring Organizations model, there are three fundamental internal control 

objectives: effective, efficient operations; reliable financial reporting; and 

compliance with laws and regulations. Internal control also includes five 

components: control environment, risk assessment, control activities, information 

and communication, and monitoring. We interviewed management and staff 

from OCIE, IM, TM, and CF. We identified and reviewed applicable policies and 

procedures, and we obtained and reviewed other pertinent documentation. We 

performed tests to determine the extent of monitoring of compliance with 

exemptive order and no-action letter conditions and representations. Finally, we 

identified areas for improvement in management controls related to the control 

environment, risk assessment, control activities, information and communication, 

and monitoring. 

Use of Computer-Processed Data. We used exemptive order and no-action 

letter data maintained by the Commission on its website at sec.gov. We used 

lists of examination reports provided by OCIE to select judgmental samples of 

reports to review. We did not perform tests on the general or application controls 

of the Commission’s system for maintaining exemptive orders and no-action 

letters because such tests were not within our review objective or subobjectives. 

We found discrepancies in some of the data that we received from management, 

such as missing and incorrect data. Therefore, to the extent practical, we 

compared the exemptive order, no-action letter, and examination report data we 

received with the underlying documents. 

Judgmental Sampling. We selected a judgmental sample of examination 

reports that were issued or had disposition dates from January 1, 2008, to March 

31, 2010. We selected our judgmental sample of examination reports related to 

no-action letters from a list of 456 examination reports provided by OCIE. OCIE 

also provided the OIG, in response to other requests, with 21 examination 

reports, all of which were reviewed. Our findings applied to the items reviewed 

and were not extrapolated to the universe from which our samples were 

obtained. 

Prior Audit Coverage. The OIG audited the exemptive application process in 

IM’s Office of Investment Company Regulation (IM Exemptive Application 

Processing, Report No. 408, September 29, 2006) to determine whether the 

process was timely and to recommend improvements. The OIG report included 

13 recommendations. Recommendations to enhance timeliness included issuing 

 

63 Government Accountability Office, Standards for Internal Control in the Federal Government, AIMD-00-

21.3.1 (November 1999).
Appendix II

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exemptive rules, filing applications electronically, and restricting or eliminating the 

review of draft exemptive applications. Other recommendations included 

returning poorly prepared applications, developing standard follow-up 

procedures, improving performance measures, and revising the database for 

exemptive applications. IM concurred with and addressed all 13 

recommendations, and all the recommendations were closed. 
Appendix III

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Criteria

Section 28 of the Securities Act of 1933. Section 28 provides general 

exemptive authority, allowing the Commission to exempt by rule or regulation, 

conditionally or unconditionally, any person, security, or transaction or any class 

or classes of persons, securities, or transactions from any provision of the 

Securities Act, to the extent that the exemption is necessary or appropriate in the 

public interest and is consistent with investor protection. 

Section 12(h) of the Securities Exchange Act of 1934. Section 12(h) provides

that “[t]he Commission may by rules and regulations, or upon application of an 

interested person, by order, after notice and opportunity for hearing, exempt in 

whole or in part any issuer or class of issuers from the provisions of subsection 

(g) of this section or from section 13, 14, or 15(d), or may exempt from section 16 

any officer, director or beneficial owner of securities of any issuer, any security of 

which is required to be registered pursuant to subsection (g) hereof, upon such 

terms and conditions and for such period as it deems necessary or appropriate, if 

the Commission finds, by reason of the number of public investors, amount of 

trading interest in the securities, the nature and extent of the activities of the 

issuer, income or assets of the issuer, or otherwise, that such action is not 

inconsistent with the public interest or the protection of investors.”

Section 36 of the Securities Exchange Act of 1934. Section 36 provides 

general exemptive authority, except for the provisions regarding government 

securities brokers and dealers, allowing the Commission to exempt by rule, 

regulation, or order, conditionally or unconditionally, any person, security, or 

transaction or any class or classes of persons, securities, or transactions from 

any provision of the Exchange Act, to the extent that the exemption is necessary 

or appropriate in the public interest and is consistent with investor protection. 

Section 6(c) of the Investment Company Act of 1940. Section 6(c) provides 

general exemptive authority, allowing the Commission to exempt by rules and 

regulations upon its own motion or by order upon application, conditionally or 

unconditionally, any person, security, or transaction or any class or classes of 

persons, securities, or transactions from any provision of the Investment 

Company Act or from any Investment Company Act rule, if and to the extent that 

the exemption is necessary or appropriate in the public interest and is consistent 

with investor protection and the policy and provisions of the Investment Company 

Act. 

Section 206A of the Investment Advisers Act of 1940. Section 206A provides 

general exemptive authority, allowing the Commission to exempt by its own 

motion or by rule, regulation, or order upon application, conditionally or 

unconditionally, any person or transaction or any class or classes of persons or 

transactions from any provision of the Advisers Act, if and to the extent that the 
Appendix III

Oversight and Compliance – Exemptive and No-Action Letters June 29, 2011

Report No. 482 

Page 35

exemption is necessary or appropriate in the public interest and is consistent with 

investor protection and the policy and provisions of the Advisers Act. 

17 C.F.R. § 202.1(d). This rule provides the basis for the informal procedures by 

which SEC staff issue no-action letters. According to this rule, “[t]he informal 

procedures of the Commission are largely concerned with the rendering of advice 

and assistance by the Commission’s staff to members of the public dealing with 

the Commission. While opinions expressed by members of the staff do not 

constitute an official expression of the Commission’s views, they represent the 

views of persons who are continuously working with the provisions of the statute 

involved.”
Appendix IV

Oversight and Compliance – Exemptive and No-Action Letters June 29, 2011

Report No. 482 

Page 36

List of Recommendations

Recommendation 1: 

The Divisions of Investment Management, Trading and Markets, and Corporation 

Finance should develop processes, including written policies and procedures, for

coordination with the Office of Compliance Inspections and Examinations

regarding reviewing for compliance with conditions and representations in

exemptive orders and no-action letters issued to regulated entities on a risk 

basis. 

Recommendation 2: 

The Divisions of Investment Management, Trading and Markets, and Corporation 

Finance, in coordination with the Office of Information Technology and the Office 

of Compliance Inspections and Examinations, should develop and implement 

processes to consolidate, track, and analyze information regarding exemptive 

orders and no-action letters issued to regulated entities. These processes 

should be documented in written policies and procedures. 

Recommendation 3: 

The Divisions of Investment Management and Trading and Markets should, in 

their plans for implementing Section 965 of the Dodd-Frank Wall Street Reform 

and Consumer Protection Act, develop procedures to coordinate their 

examinations with those conducted by the Office of Compliance Inspections and 

Examinations and, as appropriate, include provisions for reviewing for

compliance with the conditions in exemptive orders and representations made in 

no-action letters on a risk basis. 

Recommendation 4: 

In connection with monitoring efforts, the Divisions of Investment Management

and Trading and Markets should include compliance with the conditions and 

representations in significant exemptive orders and/or no-action letters issued to 

regulated entities as risk considerations.

Recommendation 5: 

In connection with its compliance efforts, the Office of Compliance Inspections 

and Examinations should include compliance with the conditions and 

representations in significant exemptive orders and/or no-action letters issued to 

regulated entities as risk considerations.
Appendix V 

Oversight and Compliance – Exemptive and No-Action Letters June 29, 2011

Report No. 482 

Page 37

Management’s Comments

MEMORANDUM 

Date: June 28, 2011 

To: H. David Kotz, Inspector General 

Office ofInspector General 

From: Robert Cook, Director, Division of Trading and MarketsfW--

Eileen Rominger, Director, Division ofInvestment Manage.!!''1.l! i '1./ ~ Meredith Cross, Director, Division of Corporation Finance~ 

Carlo di Florio, Director, Office of Compliance Inspections and Examinations 

Mary Schapiro 

Chairman 

Re: Management's Response to the Office ofInspector General's Draft Report, 

Oversight 0/ and Compliance With Conditions and Representations Related to 

Exemptive Orders and No-Action Letters, Report No. 482 dated May 16, 2011 

I. Introduction. 

The Divisions of Trading and Markets (fM), Investment Management (IM) and 

Corporation Finance (CF) and the Office of Compliance Inspections and Examinations (OClE) 

submit this mernorandwn in response to the Office ofInspector General's (OIG) Draft Report 

No. 482 entitled Oversight of and Compliance With Conditions and Representations Related to 

Exemptive Orders and No-Action Lellers, dated May 16, 2011 (''Final Draft Report"). Thaok 

you fur the opportimity to respond to the Final Draft Report. 

With respect to the five recommendations in the Final Draft Report, you requested that 

each director indicate whether or not he or she concurs with the recommendation. Each cfus 

generally concurs with all the recommendations. We note that while we generally concur with 

Recommendation 2, it will require the deployment of significant resources, a factor which could 

impact its timely implementation. 

Before we respond to the individual recommendations below, we would like to provide 

some background that we believe is important to place the Final Draft Report and our response in 

context. 

., . II. Rationale, for granting rellef. 

Our rules and statutes acknowledge the need to be able to provide relief in appropriste 

circumstances. In fact, many of our rules and statutes contain a specific exemptive authority 

provision that allows market participants to apply for, and for the Commission to grant, 
Appendix V 

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Report No. 482 

Page 38

Mr. H. David Kotz 

June 28,2011 

exemptive relief from the provisions of a rule or statute where appropriate. Exemptive relief 

may be issued by the Commission, or by the stafftluough delegated authority. Interpn::tive and 

no-action letters are issued by the staff and do not bind the Commission. 

Exemptive relief may be appropriate in various circumstances. For instance, market 

participants frequently seek to engage in activity that may be prohibited by a literal reading of 

the applicable rule or statute. Relief may be granted to such persons pursuant to safeguards that 

are adopted and implemented by condition or where other safeguards are in place that would 

render the statutory provision unnecessary. or when the conduct would benefit the market or 

investors overall (and it otherwise meets the statutory standard for granting relief). 

In addition, Commission staff may issue relief where it is unclear whether or how a . 

particular rule or statute would apply to activity in which a market participant wishes to engage. 

Conunission staff sometimes grants relief in those circumstances to provide the market 

participant greater legal certainty before it proceeds with the activity, even though it is not clear 

that the participant would violate a rule or statute if it were to engage in that activity. 

Finally. Commission staff'may issue reliefto respond to developments in the securities 

markets. Securities markets evolve at a fast pace, and sometimes a statute or rule may not 

contain an exception fur a spccific product or activity simply because that product or activity was 

not present or prevalent at the time ofthe statutory enactment or rulemaking. In that 

circumstance, a relief request infurms the staff ofncw products and activities and may form the 

basis of future rulemaking. Moreover, during market crises, limited relief may be necessary to 

furthcc the protection of investors and to eusure orderly IllWkt:ls. Who;;rt: appropriate, the issuaJlC<; 

of relief with specific conditions can provide greater certainty to market participants as to their 

responsibilities concerning that product or activity while maintaining important investor 

protections. 

m. Scope of relief. 

The effect of any no-action or exemptive relief is limited by the terms of the relief As a 

general matter, a market participant can rely on the relief only if" the participant complies with 

the representations made in the request for the relie~ and with any terms and conditions imposed 

in the response. Sometimes, however, relief is granted in situations where the application of a 

statute or rule is ambiguous; in these cases, the failure to abide by stated terms and conditio.ns 

would not necessarily mean that the entity relying on the relief is in violation of a law or rule. 

The Commission staff at times grants no action relief where the activity does not raise the 

concerns that the rule or statute is designed to address and the issuance of relief with specific 

conditions provides greater certainty to market participants as to their responsibilities concerning 

that activity. Similarly. in those cases, the failure to abide by the conditions and representations 

is not necessarily a violation of the rule or statute WIder which no-action reliefwas given. 

although it negates the ability ofthe recipient to rely on the staff' position. 

Relief also varies with respect to the entities to which it applies. Sometimes, relief 

applies to a single person or transaction only, while other times, relief applies to multiple 

persons, transactions and/or activities. For instance, market participants other than the named 

2 
Appendix V 

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3 

Mr. H. David Kotz 

June 28. 2011 

applicants may rely on class exemptive letters, or orders. and certain types of no-action letters. 

Also, many exemptive lettecs and orders contain future relief provisions that enable market 

participants that are not named applicants to rely on them. The Commission does not know 

when market participants rely on class relief unless the market participant infurms Commission 

staffofthat reliance, fur example, during an examination. And the Commission's ability to 

determine when a market participant is relying on class relief is further limited by the 

Commission's lack of examination authority over certain entities, such as issuers that register 

their securities offerings, but are not otherwise required to register. 

IV. Background on examinations. 

The staff believes that, in general. market participants that seek no-action or exemptive 

relicf do so becausc they are attuned to compliance issues and are seeking to confurm their 

activities to the Commission's requirements with respect to the particular transaction or activity. 

Thus. as a general matter, the staff does not believe that the mere fact that a market participant 

sought and received no-action or exempt.ive reliefmearul that the market participant is at a 

greater risk of violating the federal securities laws and rules than other market participants. 

oelE has primary responsibility at the Commission for exam.ining certain regulated 

entities for compliance with the federal securities laws. The self-regulatory organizations 

(SROs) are also responsible fur examining their broker-dealer members fur eompliance with the 

federal securities laws as well as SRO roles. In addition, the Commission has a robust 

enfurcement program that brings actions against both regulated and unregulated market 

participants fur violations of the federal securities laws. 

OCIE conducts examinations of regulated entities, including, among others. registered 

brokcr-dealers, transfer agents, clearing agencies. investment advisers. and investment 

companies ("regulated entities"). OCIE triages risk when allocating its limited examination 

resources and in detennining the scope of a particular examination. 

TM, 1M, CF and OCIE believe that po,tential non-compliance with the conditions of a noaction letter or exemptive order does not constitute a greater risk than the failure to comply with 

the provisions ofthe statutes and rules administered by the Commission. When conducting an 

examination. examiners review the areas within the examination's scope with a fucus on whether 

an entity's activity in that area is conducted in accordance with the federal securities laws and 

rules and, as applicable, SRO rules. Additionally, if a no-action letter or exemptive order has 

been issued to a registrant and is related to issues within the scope ofthc examination, examiners 

typically evaluate compliance with the stated eonditions and representations of tho no-action 

letter or exemptive order during the examination. In sOme cases, registrants rely on exemptive 

orders or no-action letters given to other entities. In such cases, ifOCIE identifies a potential 

violation or deficiency at a regulated entity, it is incumbent upon the regulated entity to infonn 

the examination staff that it is relying on exemptive or no-action relief and the examination team 

would then review whether such reliance is appropriate and whether the regulated entity is 

eomplying with all conditions required fur such relief. 
Appendix V 

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Report No. 482 

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4 

Mr. H. David Kotz 

JWle 28, 201 I 

As descnbed in the Final Draft Report, OCIE evaluates finns' compliance with the terms 

of no-action or'exemptive reliefand has identified instances where finns were not complying 

with the conditions and representaliOns of exemptive orders and no-action letters. However, it is 

important to note that if a regulated entity is unable to dcmonstrale its compliance with all 

conditions of the reliet; the market participant mayor may not be in violation oftbe federal 

securities laws and rules. The entity's activities may be in compliance with the applicable law or 

rule even if a representation or oondilion of the letter is not fulfilled. 

IfOCIE determines that non-comp1iance with the terms of any exemptive order or noaction letter results in a potential violation of the federal securities laws or rules, OCIE will 

generally cite the potential violalion of the underlying law or rule in a deficiency letter. 

Depending on the circumstances, the exammalion staff may refer such matters to the relevant 

rulemaking djv~ion(s) and. if warranted, to the Division of Enforcement fur further action. 

TM and 1M have input into OCIE's examination process. OCIE meets with TM and 1M 

both formany and infurmally to discuss issues such as risks, examination planning, and 

examination findings. The examination staff also consuhs with TM and 1M staff regarding 

issues that may arise during an examination. 

Given limited resources and broad program responsibilities, TM and 1M have not 

undertaken to supplemel)t OCIE's examination fun~ion by establishing Division-specific 

programs to examine fur compliance with the federal securities laws, or for compliance with the 

terms and conditions of no-action and exemptiv.e relief While we support continued and 

enhanced communication. coordination, and-interaction between OCIE and the rulemaking 

divisions (TM and 1M. and, where relevant., Cp), we strongly believe that the responsibility to 

conduct risk-based reviews fur e:ompliance with the federal securities laws and rules, as well as 

with the terms and conditions of no-action letters and exemptive relie~ should remain with OelE 

given its experience in this role, as well as the potential for conflicting or duplicative 

examination effurts. 

As you note. Dodd-Frank Act Section 965 provides that TM and 1M shall establish 

examination staffs within these divisions. TM and 1M are currently in the process of determining 

how to most effectively implement this provision. particularly in light of existing budgetary 

constraints. While decisions have yet to be made on the most efficient use of such resources, 

TM and 1M gener-a.lly expect that, their respective examination staffs will be part of integrated 

examination teams that likely will focus on areas that have been prioritized as representing 

significant risk. 

We appreciate the opportunity to ~nd to your rooommendations and value the results 

of your assessment. Responses to your reoornmendations, as set forth in your Final Draft Report, 

are below. 
Appendix V 

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Report No. 482 

Page 41

5 

Mr. H. David Kotz 

June 28. 2011 

V. Responses to recommendatioDs. 

RecommendatioD 1: 

The Divisions ofInvcstmcnt Management. Trading and Markets. and Corporation Finance 

should develop processes, including written policies and procedures, fur coordination with the 

Office ofCompliancc Inspections and Examinations regarding reviewing for compliance with 

conditions and representations in exemptive orders and no-action letters issued to regulated 

entities on a risk basis. 

• TM. CF and 1M, in consultation with OCIE. will formalize the process of coordination 

among OCIE, TM, CF and 1M with respect to OCIE's existing risk-based examination 

program fur compliance with the federal securities laws, including its review for 

compliance with the terms and TepI"csentations of excmptivc ordcrs and no-action letters, 

to the extent such orders or letters are significant and issued to regulated entities. 

Recommendation 2: 

The Divisions ofInvcstment Management, Trading and Mmkets, and Corporation Finance, in 

coordination with the Office ofInformation Technology and the Office of Compliance 

Inspections and Examinations, should develop and implement processes, to consolidate, track 

and analyze infonnation regarding exemptiv~ orders and no-action letters issued to regulated 

entities. These procedures should be documented in written policies and procedures. 

• We support development by the Commission's Office ofInformation Technology (OIT) 

of 8 system to consolidate and track information regarding no-action letters and 

exemptive orders issued to regulated entities, but only to the extent that such orders or 

letters are significant and contingent upon the availability of resources. We agree that a 

consolidated system to identity relief issued by the varlous divisions to individual IIWrlcet 

participants that are registered with the Commission may be a useful tool for OCIE. 

• The system should provide a field for comment by the divisions responsiblc for providing 

the relief as to whether the filets presented to the staff or the relief g ranted suggest a risk 

factor that should be considered by OelE in examination planning. Our review ofthe 

letters issued in the last 3 months suggests that such a field is likely to be used sparingly 

because, as noted above. in general, exemptive orders and no-action letters are given in 

situations where the risks of non-compliance either with the provisions of the letter or 

with the applicable statutory provision or rule are not high. 

• Establishing the system is a priority. but may be impacted by resource constraints. 
Appendix V 

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Report No. 482 

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6 

Mr. H. David Kotz 

June 28, 2011 

Rec:ommendatioD 3: 

The Divisions ofInvestffiCnt Management and Trading and Markets should, in their plans for 

implementing Section 965 ofllie Dodd-Frank Wall Street Reform and Consumer Protection Act, 

develop procedures to coordinate their examinations with those conducted by the Office of 

Compliance Inspections and Examinations and,. as appropriate, include provisions fur reviewing 

fur compliance with the conditions in exemptive orders and representationS made in no-action 

letters on a risk basis. 

• TM and 1M support the development of procedures to facilitate examinations that 

integrate personnel in those divisions and OClE examiners into joint examination 

activities. As noted. any reviews of compliance with conditions and representations of 

exemptive orders and no-action letters, like the underlying examinations, should be riskbased (and. thus, fur example, required only for significant orders or letters). Further, 

such reviews by necessity will be contingent upon the availability of resources. We 

anticipate that TM and 1M likely will have extremely limited examination resources. 

Rec:ommendatloD 4: 

In connection with monitoring effOrts, the Divisions oflnvestment Management and Trading and 

Markets should include compliance with the conditions and representations in significant 

exemptive orders and/or no-action letters issued to regulated entities as risk considerations. 

• It is important to note that Commission staft such as OCIB. primarily conducts riskbased reviews and examinations fur compliance rather than engaging in monitoring 

efforts. 

• TM conducts targeted monitoring for financial and similar risks of certain registrants, but 

generally does not engage in systematic monitoring of compliance with laws or rules, or 

with conditions for exemptive or no-action relief. The scope of this activity is limited to 

the specific risks being monitored. Thus, as a practical matter, such monitoring would 

not normally cover compliance with the majority of exemptions or no-action letters, as 

such letters would not be relevant to the specific risks being reviewed. Of course, if 

during these reviews, the staff is considering matters directly related to a significant noaction lettCl' or exemption, the staff would, as appropriate, take into consideration 

whether the risk monitoring should include a review for compliance with conditions and 

representations of that no-action letter or exemption. 

• Thus, while we support continued and enhanced communication, coordination. and 

interaction between OeIE and the mlemak:ing divisions, we strongly believe that the 

current responsibility to conduct risk-based reviews for compliance with the federal 

securities laws and. rules, as well as with the terms and conditions of no-action letters and 

exemptive relief, should remain with OCIE given its experience in this role, as well as the 

potential fur conflicting or duplicative examination efforts. 
Appendix V 

Mr. H. DavidKotz 

June 28, 2011 

Oversight and Compliance – Exemptive and No-Action Letters June 29, 2011

Report No. 482 

Page 43

7 

Recommendation 5: 

In connection with its compliance effurts, the Office of Compliance Inspections and 

Examinations should include compliance with the conditions and representations in significant 

exemptive orders and/or no-action letters issued to regulated entities as risk considerations. 

• OCIE supports including consideration of compliance with key conditions and 

representations in significant exemptive orders and/or no-action letters as risk 

considerations during its process of selecting and conducting examinations ofregulated 

entities fur compliance with the federal securities laws. 
Appendix VI

Oversight and Compliance – Exemptive and No-Action Letters June 29, 2011

Report No. 482 

Page 44

OIG Response to Management’s Comments

The Office of Inspector General (OIG) is pleased that the Divisions of Trading 

and Markets (TM), Investment Management (IM), and Corporation Finance and 

the Office Compliance Inspections and Examinations (OCIE) concurred with all 

five recommendations in this report. We believe that implementing these 

recommendations will enhance the Commission’s oversight of compliance with 

conditions and representations in exemptive orders and no-action letters. 

While the Divisions and OCIE noted resource constraints in their response, 

particularly associated with Recommendation No. 2, pertaining to tracking and 

analysis, we maintain that the development of a uniform system to consolidate 

and track information regarding exemptive orders and no-action letters issued to 

regulated entities would significantly strengthen the SEC’s ability to monitor 

compliance with the conditions and representations contained therein. We are 

pleased that the Divisions and OCIE have indicated that establishing this system 

is a priority. 

With respect to Recommendation No. 4, we agree that the primary responsibility 

for conducting risk-based reviews for compliance with the federal securities laws, 

as well as with the conditions and representations in exemptive orders and noaction letters issued to regulated entities should remain with OCIE. However, we 

are also pleased that TM and IM have concurred with the recommendation that 

they include compliance with conditions and representations in exemptive orders 

and no-action letters as risk considerations in their reviews of matters as 

appropriate. 
Audit Requests and Ideas

The Office of Inspector General welcomes your input. If you would like to 

request an audit in the future or have an audit idea, please contact us at

U.S. Securities and Exchange Commission

Office of Inspector General

Attn: Assistant Inspector General, Audits (Audit Request/Idea)

100 F Street, N.E.

Washington D.C. 20549-2736

Telephone: 202-551-6061

Fax: 202-772-9265

E-mail: oig@sec.gov

Hotline 

To report fraud, waste, abuse, and mismanagement at the SEC, 

contact the Office of Inspector General at

Telephone: 877.442.0854

Web-Based Hotline Complaint Form:

www.reportlineweb.com/sec_oig