Compliance Solutions for Investment Advisers

National Examination Program

The SEC has implemented a risk-focused National Examination Program (“NAP”). Through this program, the SEC will gather and track information on private equity advisers’:

– internal systems,

– material changes in business activities such as lines of business or investment strategies,

– changes in key personnel,

– outside business activities of the firm or its personnel,

– regulatory history of the firm or its personnel,

– anomalies in key metrics such as fees and performance,

– disclosures compared to peers or to previous periods, and

– possible financial stress or weaknesses.

In its efforts to identify high-risk areas, the SEC’s Office of Compliance Inspections and Examinations may rely on NAP results, other SEC divisions, other regulators, and external information sources on other types of firms. The Commission will use that data for top-down and bottom-up assessments to pinpoint firms with higher-risk profiles. With that knowledge in hand, the SEC will perform pre-exam work and due diligence for focused document requests and interviews that target higher-risk firms for actual exams. During the examinations, the SEC will want evidence of the existence and effectiveness of an adviser’s process for identifying, assessing, and addressing potential conflicts of interests.

Risk areas that might be considered during an SEC exam regarding private equity could include:

– the fund strategy,

– disclosures to investors around fees,

– product diversity,

– fund lifecycles,

– the adequacy of compliance procedures, and

– management’s attitude toward compliance and the exam process.

 

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