The GAO gathered its information at Congress’ request after the mutual fund industry was plagued by scandals involving market-timing and late trading violations.
In its report, the GAO says that, in light of the fund scandals, the SEC determined that its practice of conducting routine examinations of all funds on a regular schedule is not the best means for identifying problems. The SEC has changed its practices to examine only funds deemed at high risk on a regular schedule, and also is forming teams to monitor some of the largest groups of advisers and funds.
The GAO believes the tradeoff of these revisions will be to limit the SEC’s capacity to examine funds considered a lower risk within a 10 year period, and to limit its capacity to accurately identify which funds are higher risk and target those funds for examination.
The report also said that the SEC’s recent rule requiring hedge fund advisers to register with them will further tax the commission’s resources and increase its exam workload.
While the SEC has integrated some quality controls into its routine exams, the GAO points out certain improvements that can be made to the quality control processes. They suggest the SEC require supervisors to review the exams and document their review. They also suggest the SEC examiners prepare written exam plans to use as a guide for the exam and as a check to make sure the exam included everything intended.
Finally, the GAO reports that the SEC’s oversight exams of Self-Regulatory Organization’s (SRO’s) broker-dealer exams provide limited information for helping SRO’s improve their exams and creates duplicate costs for firms. This is due to the fact that the SEC and SRO conduct their exams with different guidelines and over different periods. The GAO also said the SEC can not readily determine the extent to which its oversight exams assess mutual fund sales practices since it has not developed an automated system to track the full scope of its oversight exams.
The GAO report is here .