SEC Exemptions Need Monitoring

Having no formalized process poses risks, watchdog reports.


The U.S. Securities and Exchange Commission needs to improve oversight of firms exempt from certain regulations, the agency’s watchdog said, citing “numerous” cases in which companies violated conditions of the waivers.

SEC staff have “no formalized process” to track whether firms are complying with the conditions of their exemptions, Inspector General H. David Kotz said in a report posted today on the SEC’s website. That may pose “substantial” risks “because exemptive orders and no-action letters allow industry participants to conduct activities that, without the relief, could violate the securities laws and regulations,” Kotz said.

The SEC can issue exemptive orders and so-called no-action letters to allow transactions that may not have been contemplated when the securities laws were written. Those transactions may otherwise violate rules, so the exemptions are often conditional on the firm’s compliance with certain standards, Kotz said. A no-action letter states that the staff will not pursue an enforcement action in response to the proposed activity.

The SEC divisions that grant exemptions and set conditions do not coordinate adequately with examiners that monitor the firms, Kotz said. Currently, inspectors don’t necessarily identify the exemption as a risk factor during their exams, or track compliance, according to the report. Examiners keep their own “ad hoc” records, the report said, because there is no centralized database.

Kotz recommended that the agency establish processes and databases to increase coordination to ensure examiners properly track whether the firms are complying with conditions. In a June 29 letter to division managers, Kotz asked for a corrective action plan within the next 45 days.


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