What Is SEC And How It Takes Action Against Deficiencies In Compliance Programs?

The US government agency SEC or securities & exchange commission oversees the financial professional’s doings, securities transaction, and even the mutual fund trading activities to prevent intentional deception and frauds. Five commissioners comprise the SEC, who serves for 5-year terms. Out of these five commissioners only three of them can belong to a single political party.

Four divisions of SEC

  1. Corporate finance division – Ensures the corporate disclosure of crucial information to public investors.
  2. Trading & market division – Ensures order, fairness, and effectiveness in market actions.
  3. Investment management division – Helps to protect the investors and encourage capital formation via supervision and regulation of investment management sector.
  4. Enforcement division – Investigates law violations of securities and initiates civil & criminal activities.

Why was SEC created?

During great depression with the approval of 1934 Securities Exchange Act, the SEC was created. It was intended to strengthen confidence in the capital market by supplying investors with trustworthy information. Moreover, corporations and individuals transact with one another honestly.

Financial crisis in 2008

During financial crisis of 2008, the SEC enforcement division has penalized nearly 100 businesses and professionals in financial service for misconduct, which cropped up from this crisis. Dozens have been banned and many had commissions suspended. Majority of the charges involved compliance issues.

What kind of misconduct has SEC sought to address?

Majority of SEC enforcement division activities in relation to financial crisis was to handle risky mortgages, which fall under 3 main categories.

  1. Misleading investors
  2. Concealing risk under complex product structure
  3. Hiding risky investments extent in mutual funds & other financial products

Millions of dollars were charged as penalties to settle charges against misleading statements and omitted facts related to mortgage products. Dozens of CFOs, CEOs and senior corporate officers were charged and some were permanently barred from working in securities industry.

SEC enhancement to enforce compliance & prevent fraud

The SEC’s OCIE (Office of Compliance Inspections & Examinations) has enhanced its investigation process. The SEC examiner first checks the company’s book & records, analyzes operation, interviews employees to detect any loop holes in compliance with safety rules.

OCIE studies the firm’s compliance system quality and internal core environment. OCIE staff sometimes visit businesses without prior notice. More Info at http://focus1associates.com/ will give you an idea about what OCIE checks.

What OCIE staff checks?

  • Risk management processes – Are these processes able to detect the possible weaknesses like the impacts of mergers, acquisitions, and cost cutting? Moreover, is there an effective compliance & risk management plan for intricate investments & strategies?
  • External activities compliance monitoring – There is sufficient supervision of external business activities and enough observance at the branch offices or independent supervisor working from remote location.

SEC enforcement activities can affect chief compliance officer

SEC takes steps to detect compliance deficiencies, in advance. It helps to keep away misconduct or fraud, which can be harmful to investors. The SEC compliance officer will first warn the company about the deficiencies. If this warning is ignored then the company and possibly the chief compliance officer responsible for administering policies and procedures properly will be charged or penalized or even banned.