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SEC Announces Examination Priorities for 2015 - And New Year’s Resolutions for CCOs

As the SEC has been doing at the start of each year in recent years, the SEC announced its examination priorities for the new year. For 2015, the SEC’s priorities focus on three general areas: (i) protecting retail investors and investors saving for retirement; (ii) assessing market-wide risks; and (iii) using enhanced data analytics to identify illegal activity.

The SEC highlighted certain additional priorities, and of these we think the following are more noteworthy to our investment adviser and registered investment company clients:

  • “Alternative” investment companies – the SEC Staff will continue to assess “liquid alt” funds, focusing on (i) leverage, liquidity, and valuation policies and procedures; (ii) adequacy of internal controls such as staffing, funding, board oversight, compliance personnel, and back-offices; and (iii) marketing practices;
  • Cybersecurity – the SEC Staff will continue their efforts to examine those investment advisers’ controls and compliance indicated in its cybersecurity initiative launched in 2014;
  • Proxy voting – The SEC Staff will examine investment advisers’ compliance with their fiduciary duty in voting proxies on behalf of investors;
  • Never-Before-Examined Investment Companies -- The SEC will conduct focused, risk-based examinations of selected registered investment company complexes that have not been examined; and
  • Private equity fees and expenses – The SEC Staff will continue its examinations in this area, given the high rate of deficiencies that they have found.

Accordingly, we believe investment adviser and registered investment company clients should review their policies and procedures in the areas the SEC Staff has highlighted as examination priorities for 2015. In particular, some areas were previously covered in examination priorities or other risk alerts in 2014, e.g., cybersecurity; private equity fees and expenses; and “liquid alts”. Clients who fall into the never before examined category should also review their practices.

In addition to reviewing the foregoing areas, and bearing in mind the SEC’s record year for enforcement, we offer some “resolutions” for 2015 from a compliance standpoint.

1. Take a “fresh look” at your compliance program

“This October marked the 10th anniversary of the compliance date for Rule 38a-1 which requires funds to adopt, implement and annually review compliance policies and procedures reasonably designed to prevent violations of the federal securities laws and also requires that funds designate a chief compliance officer. The rule…stresses the importance of strong compliance programs in preventing violations of law as well as the important role that compliance professionals play in ensuring a strong culture of compliance.” - Norm Champ, Director, Division of Investment Management (complete speech)

With the focus of SEC examinations shifting and becoming more concentrated, compliance officers must be committed to developing and employing a strong compliance program. Enrichment of firm policies and procedures already in place can be accomplished by adopting a more “risk-based” approach to review of the program. By incorporating concrete forensic testing into the procedures already on the books, firms are showing the SEC that they are enthusiastic about, and cognizant of, the need to improve their program on a continuous basis to keep up with the changing regulatory environment.

To reinforce a strong compliance program and stay in line with industry best practice, many firms are adopting compliance calendars that incorporate not only regulatory deadlines, but also outline ongoing responsibilities throughout the year, including periodic review of areas such as Business Continuity, Restricted List maintenance, and proper documentation of employee attestations.

A simple way to aid in the creation and application of a strong compliance program is to consider engaging with a third party to conduct an unbiased review of the firm’s compliance program on a periodic basis.

2. Make compliance more “user friendly”

Whether we like it or not, the onus of fostering a culture of compliance often falls on compliance professionals. Many see the compliance team as “hall monitors” because of the important obligations that fall under their purview. While it may not seem like it, there are many ways to incorporate the concepts of compliance into everyday life within the firm. Most organizations conduct yearly employee training to cover company policies and procedures. By combining general company training with compliance training, employees are more apt to take the compliance program aspects equally as serious as those communicated on a general firm level. However, the compliance team should be mindful not to allow the specific compliance concepts to be buried within the wealth of information provided during these meetings. One way to ensure to keep the attention of employees during training sessions is to make the information directly applicable to the firm by discussing enforcement cases that involve comparable firms and subsequently the consequences of non-compliance with SEC rules and regulations.

3. Be prepared!

Making sure your firm is in a good position to welcome the SEC Staff for an examination should be high up on your “to-do” list for 2015. Using recent examination request letters and the SEC’s Examination Priorities for 2015 can provide a useful roadmap for a potential examination.

Andrew Bowden, OCIE’s Director, shared the thought process of the SEC in issuing their examination priorities and risk alerts: the SEC believes that when they share their “areas of focus, many industry participants independently review their controls in the areas we have identified.”

During the 2014 ICI Securities Law Developments Conference, Director of the Division of Investment Management, Norm Champ, also emphasized risk monitoring as an important area of focus, saying that “[e]nhancing the Division’s ability to monitor and better understand the investment management industry has been a focus — both by launching new initiatives to monitor risk and by sharpening the existing tools at our disposal.”

Conclusion:

Chair Mary Jo White reiterated that enforcing the SEC’s rules and regulations is at the forefront of their priorities. “Aggressive enforcement against wrongdoers who harm investors and threaten our financial markets remains a top priority, and we brought and will continue to bring creative and important enforcement actions across a broad range of the securities markets”.

By “resolving” to implement the above ideas and practices, firms can be better prepared for an SEC examination, and for a better outcome from any examination.


SEC3 can assist your firm in helping you create and implement your compliance projects and guide you on your compliance priorities.

For further information, please contact your regular SEC3 representative or contact us at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

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