Covid-19 having expected, and unexpected, consequences for exams and enforcement

OCIE exams are continuing amid covid-19 disruptions, but remote working conditions are slowing them down, say lawyers from Debevoise & Plimpton.

Remote working conditions caused by covid-19 complications are slowing down SEC examinations, said lawyers from Debevoise & Plimpton in a webinar titled “Covid-19 & private equity: Portfolio company and fund governance practices in the time of covid.”

See all Private Funds CFO‘s coverage of covid-19 and its impact

On March 24, Pete Driscoll, director of the Office of Compliance Inspections and Examinations (OCIE), said the office is still conducting exams and is being very careful about those it carries out. “To the extent we reach out to a firm, we are working with them in terms of timing,” said Driscoll during a conference call on navigating the regulatory response to covid-19.

“There are a lot of mulligans on this. All of our examiners are working from home. We have 1,026 people and no one is in the field. No one is at a registrant,” he added.

But Debevoise & Plimpton lawyers said conditions are taking their toll on their exams. “Of course exams can’t be on site with a registrant, which is a really important part of most of their exams,” said Julie Riewe, litigation partner at Debevoise & Plimpton and a member of the firm’s white collar and regulatory defense group. “So it’s having a real impact, and of course, it’s going to impact their numbers this year.”

OCIE has made the switch to conducting examinations electronically, and Driscoll doesn’t expect that to change anytime soon. They will only be sending personnel into the field if deemed “absolutely necessary.”

Side-effects on enforcement

According to Riewe, SEC enforcement actions are continuing at pace, but the level of detail brought on is different than in the past. With little else to do besides comb through documents, staff are bringing a remarkable level of focus to document reviews.

But testimony logistics have become difficult to coordinate, with OCIE staff, witnesses and counsel all in separate locations.

“How can counsel responsibly present witnesses for testimony in that scenario where not only is prep difficult, but actual representation during the testimony is really nearly impossible when you’re not sitting with your clients,” said Riewe.

Thus far, several testimonies have been postponed indefinitely, with some peripheral witnesses being reached by phone and video, as well as some by attorney proffer instead of actual testimony, according to Debevoise.

Riewe said the Commission has also signaled its flexibility on document return dates, both in terms of document production and written submissions.

“While there’s been lots of messaging from the SEC that it’s essentially business as usual, it clearly isn’t, for these reasons,” said Riewe.

As remote working conditions continue for the foreseeable future, and with the September 30 end of the fiscal year high on its mind, the Commissions’ priorities will become clear in the coming weeks.

The OCIE has already updated its examination questions to include issues related to covid-19.

“We expect to see them making very hard decisions in the near term about which exams and investigations are going to be prioritized,” Riewe said. “And the rest are either going to drift indefinitely or go away.”