New Themes Emerge from SEC 2014 Examination Priorities

Advisers & Funds

The SEC's Office of Compliance Inspections and Examinations (OCIE) recently announced its Examination Priorities for 2014. This is the second year in which the SEC released this level of insight into its annual National Exam Program (NEP) priorities. Like the SEC’s 2013 communication, this announcement is well worth the read, identifying NEP-Wide Initiatives as well as core risks and new/emerging issues specific to advisers and funds.

We want to highlight a few items we found interesting within the SEC’s Examination Priorities piece. New thematic topics on the SEC’s radar this year include:

  1. Examining those advisers that have been registered for more than three years but have not yet been examined. If you have not been examined yet – get ready! While the SEC staff periodically makes noise about examining these advisers, including this provision in the Exam Priorities adds weight to the initiative.
  2. Testing compliance with new mandates under newly-enacted laws and regulations, including: a) the new JOBS Act-driven general solicitation rules and due diligence verification processes of accredited investor status under 506(c) of the ’33 Act and requirements under the new crowdfunding provisions of the JOBS Act; and b) compliance with the recently enacted municipal advisers rules. There is a lot of SEC activity now surrounding the municipal adviser rule – we will release a separate communication regarding this rule as these issues continue to shake out.
  3. Focusing on investors in need of retirement and rollover services, including how advisers and funds market and advertise to these investors and whether suitability, churning or conflicts of interest matters are adequately addressed. The SEC considers this market as higher risk – use extra caution when dealing with retirement assets.
  4. Wrap fee programs – ensure you are treating each wrap account as an individual client account. How are you reviewing for best execution? Be sure your disclosures are thoughtful and complete, including disclosure of whether you trade away from the wrap program sponsor.
  5. Quantitative trading models – how will you respond when the SEC examiners ask how you are testing the firm’s “secret sauce”?
  6. Fixed income fund – are your disclosures accurate in light of the volatile interest rate environment? The SEC recently provided additional guidance on this very topic.
  7. Securities lending arrangements – are all parties involved following guidelines outlined within existing no-action letters and exemptive orders?
It is equally important to consider matters on which the SEC continues to focus – those topics from 2013’s Exam Priorities communication that continue to be highlighted in 2014, including:
  • Custody matters – the SEC continues to see widespread issues with advisers complying with the Custody Rule (Rule 206(4)-2 of the Advisers Act). As such, the SEC is actively focusing on custody matters, recently bringing a number of enforcement cases. Be mindful you could be deemed to have custody if you: 1) serve as a trustee for client accounts; 2) access your client’s custodian accounts via the client’s user name and passwords; or 3) are able to unilaterally change your client’s beneficiaries or address on record with the custodian.
  • Marketing/Performance – be cautious if you choose to use hypothetical or back-tested performance figures, as this practice is ripe for the SEC staff to criticize in hindsight.
  • Presence Exams – A continued SEC focus, with private fund advisers as the target of the majority of these exams. If your firm invests with alternative investment advisers or funds, the SEC’s Office of Compliance Inspections and Examinations recently provided a Risk Alert summarizing practices the Examination Staff has observed related to due diligence performed. This Risk Alert is worth considering as you build out or expand your firm’s due diligence efforts.
  • Identifying unaddressed conflicts of interest, potentially including: a) compensation arrangements; b) allocation of investment opportunities; c) disclosure issues with performance-based or asset-based fee arrangements and illiquid or leveraged investments; and d) marketing higher risk products to generally more “vulnerable” investors.
  • Fraud detection and prevention continues to be a top priority to the SEC in preserving investors’ trust in our markets. The SEC intends to lend considerable resources in identifying and pursuing Enforcement action against scams involving theft and fraud.
Despite the SEC’s well received transparency as evidenced by these open communications, we continue to operate in a challenging regulatory environment. Wondering how your compliance program stacks up relative to the SEC’s expectations? Our mock SEC exam service considers all of the elements outlined within the Examination Priorities communication. Further, while assisting our clients manage their SEC exams, we see the Examination Staff focusing on the themes outlined within this Examination Priorities communication.

As always, please do not hesitate to call if we can ever be of service to you.








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