Dear Chairman Cox:
Last year, I requested that the Government Accountability Office (GAO) conductreviews of the operations of the Securities and Exchange Commission (SEC). I recentlyreceived the second of two reports, GAO-08-33, entitled "Securities and ExchangeCommission: Opportunities Exist to Improve Oversight of Self-Regulatory Organizations(SROs)." Reliance on SROs, such as the major stock exchanges, to police their memberscan work effectively only if the operations of the SROs are open and transparent.Therefore, I was disturbed to learn that the SEC does not obtain copies of internal auditsand investigations conducted by SROs.
According to the GAO, it recommended four years ago that the SEC routinely usesuch internal audits and investigations to plan and conduct inspections of SROs. TheSEC did not implement that recommendation. Recent SEC guidance calls for SROs tomerely allow "on-site" access to internal documents during SEC inspections. This is notan adequate substitute for actually implementing the GAO recommendation by obtainingcopies and reviewing the documents to inform the planning of SRO inspections.
I urge you to ensure that SEC staff obtain and review internal SRO audit reportson a routine basis. While the SEC told GAO that it intends to study and consider howreliable such reports may be, that does not go far enough toward implementing GAO'srecommendation from four years ago. If the SEC had begun routinely obtaining thesereports four years ago, it would already have an idea of how reliable they are. It shouldnot take this long to do something so basic. Given that SROs are entrusted with directregulation of the securities industry, there is no excuse for them being anything less thancompletely transparent to the SEC.
I would appreciate an explanation of why the SEC has been so slow to act on thismatter and a description of your plans for ensuring that the SEC begins to routinelyobtain and review internal SRO audits and investigations.
Sincerely,
Charles E. Grassley
Ranking Member
