Government shutdown crimps SEC exams

Compliance attorneys notice SEC standing down on examinations underway

Jan 3, 2019 @ 2:18 pm

By Mark Schoeff Jr.

If you're an investment adviser hoping to avoid a Securities and Exchange Commission exam, the partial government shutdown now in its second week is working in your favor.

Although the shutdown, which started Dec. 22, proceeded quietly during the holidays, it is now starting to have more visible repercussions. One impact on investment advisers: the SEC appears to have halted investment adviser exams.

In a shutdown operations plan posted on its website, the SEC states that its Office of Compliance Inspections and Examinations will not conduct non-emergency examinations and inspections. The agency also is suspending investigative work.

"This likely means that where there's an indicator of imminent fraud or misappropriation of client funds, OCIE will go in, but if there is no direct or imminent threat, it likely won't be considered an emergency," Gail Bernstein, general counsel at the Investment Adviser Association, wrote in an email.

That seems to be the reality on the ground.

Michelle Jacko, managing partner at Jacko Law Group, called the SEC exam office Thursday to obtain a secure link for submitting documents.

"I was directed to an emergency telephone number, if needed, and the voicemail indicated that the staff is unavailable until the shutdown ceases," Ms. Jacko wrote in an email.

Amy Lynch, president of FrontLine Compliance, also said that she has noticed the SEC standing down.

"There has been no word from the SEC since the shutdown for the exams we're working on with clients," Ms. Lynch said.

It's difficult to know whether every SEC exam that was underway before President Donald J. Trump and congressional Democrats reached an impasse over funding for a border wall has been suspended. An SEC spokesman declined to comment and referred to the shutdown operations plan.

Broker exams conducted by the Financial Industry Regulatory Authority Inc. are continuing because the self-regulator is funded by industry fees rather than a government appropriation.

Ms. Lynch, a former SEC examiner, said that ordinary SEC inspections have likely been nixed because the agency would have to fund examiners' travel to advisory firms — something not likely to occur during a shutdown.

"A routine exam is not mission critical," Ms. Lynch said.

The timing of the shutdown is awkward for OCIE. It came just two days after the division launched its 2019 examination priorities. The document was released earlier than normal. Perhaps OCIE was trying to get it out the door before the shutdown locked it.

The SEC will continue operations that are funded by a contract, such as the Investment Adviser Registration Depository. The IARD will accept new or pending investment adviser applications but they will not be processed. The system also will continue to accept annual Form ADVs.

The Division of Investment Management will not issue interpretive guidance or exemptive relief during the shutdown.

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