Compliance Solutions for Investment Advisers

SEC Exam Priorities – Update

Dear Compliance Professional,
As part of its 2014 Exam priorities, the SEC announced that the “staff will utilize a number of strategies to conduct focused, risk-based examinations of the adviser population that has been registered for more than three years but has not yet been examined . . .”
The SEC also announced that the staff will continue the 2012 initiative to conduct “presence exams” for newer registrants that have never been examined by the SEC.  These “presence exams” focus on five key areas:
  1. Marketing
  2. Portfolio management
  3. Conflicts of interest
  4. Safety of client assets; and
  5. Valuation.

The purpose of this Compliance Alert is short and simple – to inform you that the SEC is keeping true to its word.

Based on the SEC’s activities so far this year, it is clear that they are conducting examinations of advisers who have not been examined within the past 3 years. We have been informed by numerous clients that the SEC has contacted them – either to conduct an on-site exam or to conduct a presence exam.

In all the years I’ve been writing this newsletter I have never ever pitched a service or a product. But if you fall into the category of not having been examined in the last three years, you may want to strongly consider having a mock audit conducted
on your firm. Better that you find the problems before the SEC finds the problems.

New Risk Alert Issued
In other news, the SEC’s Office of Compliance Inspections and Examinations issued a Risk Alert on the due diligence processes that investment advisers use when they recommend or place clients’ assets in alternative investments such as hedge funds, private equity funds, or funds of private funds.

The alert describes current industry trends and practices in advisers’ due diligence. Compared to observations from prior periods, the staff noted that advisers are:

  • Seeking more information and data directly from the managers of alternative investments
  • Using third parties to supplement and validate information provided by managers of alternative investments
  • Performing additional quantitative analysis and risk assessment of alternative investments and their managers.

Additionally, staff observed certain deficiencies in several of the advisory firms examined, including:

  • Omitting alternative investment due diligence policies and procedures from their annual reviews, even though these investments comprised a large portion of certain advisers’ investments on behalf of clients
  • Providing potentially misleading information in marketing materials about the scope and depth of due diligence conducted
  • Having due diligence practices that differed from those described in the advisers’ disclosures to clients.

A copy of the Risk Alert can be found here.

line