The SEC's Chief Economist, Craig Lewis, reecently noted the importance of creating an examination model that is both sensitive to registrants’ business models but also informs SEC exam staff of high risk areas that warrant further examination. He believes that any analytical approach should be tailored to address two primary questions. First, how does a particular firm compare to other firms in the same business? And second, using the information we have on the full space of registrants, can SEC staff identify registrants that can be considered outliers relative to other registrants in the same line of business?
Answering the first question informs any future examination or investigation of the registrant, said Mr. Lewis,who is also the Director of the Division of Risk, Strategy and Innovation. For example, if the registrant is suddenly mentioned in the press the metrics could lend perspective to any media discussion. Using the analysis to generate a ranked list of outlier registrants would answer the second question.
If a registrant has observable characteristics that are measureable using data available to regulators, he continued, a process can be established for evaluating that registrant and similarly situated registrants within a consistent framework. Analytics can then help evaluate the registrant in the most efficient and targeted way.
For example, analytics give examiners and investigators a baseline from which to establish the underlying fact pattern that caused the registrant to be identified as high risk. Thd Director said to think of an analytically informed monitoring program as a process that ends with a ranking system that compares the analytical characteristics of a registrant relative to similar registrants. With this information readily in hand, he noted, inspection and examination teams can then make subsequent determinations that best reflect their program’s priorities.