newyork1.jpg

SEC "Presence" Exams - Four Focus Areas

Andrew Bowden, Deputy Director of the Securities and Exchange Commission’s (“SEC”) Office of Compliance Inspections and Examinations (“OCIE”) and in charge of OCIE’s national examination program recently provided some new details[1] regarding OCIE’s examination program with respect to the over 1,400 newly-registered advisers to private funds.[2]

Mr. Bowden described the three phases of the current program as it relates to the SEC's approach towards these newly-registered managers as follows:

  1. Engaging and informing the new registrant population on the SEC’s program and priorities (it is expected that all newly-registered advisers will, in the next few weeks, receive a letter from the SEC discussing these OCIE initiatives);
  2. Examining the new registrants; and
  3. Reporting to the interested parties at the SEC, such as the Division of Investment Management and the Commission itself, and among the registrant population regarding the findings of these examinations. 

Mr. Bowden described the examinations as “presence” examinations where the SEC staff would make their presence known to registrants who are newly-registered.  The “presence” exams are narrowly-focused, risk-based exams which will thoroughly concentrate on one or two issues in order to provide a first-hand assessment of the adviser’s control environment and operations.  It is anticipated that such thorough concentration on certain areas would prompt advisers to be diligent with respect to those other areas not covered in detail during a “presence” examination.

Advisers also should be aware that the SEC will still be conducting some of the more traditional examinations where the adviser’s compliance program as a whole is the focus.  In some regions, Mr. Bowden said that the SEC staff may possibly be able to examine all newly-registered advisers while in other regions with a high-concentration of new registrants, such as New York City, a “reasonable” number of registrants would be selected for these examinations.

Mr. Bowden noted that approximately 20 percent of the registered investment advisers prior to the addition of the newly-registered advisers were advisers to hedge funds.  Accordingly, the “presence” examinations would concentrate on those areas which, based on past experience, had resulted in the highest incidence of risk and deficiencies with respect to private fund advisers. The four primary areas of focus will be:

  1. Marketing and advertising which, in addition to marketing materials, includes the use of finders, disclosure of side letters with investors, representations made to investors and how they compare to an adviser’s actual practices, and how funds of funds describe their due diligence process with respect to underlying funds, among other things. Mr. Bowden stressed the importance of doing what you say you do. He noted that advisers often make representations about, for instance, their investment process that do not reflect the reality of their practices.  With respect to side letters, he noted that the representations and clauses in such letters are not always followed.  For instance, registrants do not always send the notices required by the terms of the side letters or meet their most favored nation obligations.  
  2. Portfolio management covering mainly trade allocation among clients of the adviser, in particular, fair allocation of limited investment opportunities.
  3. Conflicts of interest specifically reviewing revenue sources, expenses and payments to finders and other third parties, thorough disclosures regarding conflicts of interests, personal securities transactions, and transactions with affiliates. Mr. Bowden said that the SEC will closely monitor transactions where managers move securities and other investments from one fund to another.
  4. Safety of client assets. Interestingly, Mr. Bowden included here not only custody of client assets but also valuation of securities. He also reminded advisers that passwords and user IDs providing them access to client checking accounts and credit cards equal custody and the relevant custody rules apply. Mr. Bowden said that previous SEC exams found several advisers that engage in such practices when offering full services to their clients.

A number of our clients have recently gone through one of these narrowly-focused SEC “presence” exams.  If you are interested in additional information about the process and how best to prepare, please contact us.



[1] Mr. Bowden has been actively using his various speaking engagements to lay out for the industry what to expect concerning OCIE's exam initiatives of newly-registered advisers. Recent speaking engagements included IA Watch's 12th Annual Fall Compliance Conference, September 24, 2012 and  Practising Law Institute Conference on Operational and Compliance Requirements for Hedge Fund Managers, September 5, 2012.

[2] Approximately 60 percent of which are advisers to hedge funds and 40 percent advisers to private equity funds. 

 

 

 

Newsletter

Get the latest compliance news and insights - delivered weekly. The SEC3 Communique covers all compliance topics. CCO3 focuses on CCO topics.
tip: check both to keep informed!

Communiques

Exciting Summer Project -- Dig Into Some Sand or Dig Into Your Firm's Best Ex Pr…

The Office of Compliance Inspections and Examinations (OCIE) issued a risk alert July 11 targeting investment advisers’ most common deficiencies with regard to their best execution obligations under the Investment... read more »

SEC Adopts Fund Liquidity Reporting and Disclosure Changes

The final week of June was a busy one for SEC releases following the SEC’s June 28th open meeting. Among these was a revisit of Rule 22e-4 under the Investment... read more »

More SEC Settlements - This Time Form PF Filing Deficiencies

On June 1st, the SEC announced settlements with 13 RIAs who repeatedly failed to file Form PF reports. Most of these firms never filed over the review period (2012 through... read more »

Two Recent Enforcement Actions Against Private Fund Advisers

The industry should not misinterpret the SEC’s 2018 National Exam Program Priorities as a shift away from private fund advisers. As discussed during the SEC’s recent National Compliance Outreach Seminar... read more »

2018 - Are you ready for your next SEC exam?

The pool of registered investment advisers that will be subject to an SEC exam in 2018 is at the highest level seen in years. The SEC projects it will examine... read more »

Navigating the Changes to Form ADV

On August 25, 2016, the U.S. Securities and Exchange Commission adopted numerous substantive and technical amendments to Form ADV. While the adopting release required advisers to begin complying with the... read more »

Events

Dorsey PF 2018 Symposium

When: September 26, 2018 (8:30 am - 6 pm Where: Dorsey & Whitney LLP | 51 W. 52nd Street | New York, NY 10019 Directions > SEC3’s President, Janaya Moscony will join...

Chief Compliance Officer Roundtable: Breakfast Briefing - June 14, 2018

When: June 14, 2018 Where: Blank Rome LLP | The Chrysler Building | 405 Lexington Avenue | New York, NY 10174 | 22nd Floor Boardroom | Phone: 212.885.5000 Schedule: 9:00-9:30am - Networking...

Webinar: 2018 SEC Exam Priorities & Recent Exam Highlights

Don’t miss the opportunity to meet with us in person to discuss the topics that matter most to you. Tobin S. Cochran, Managing Member/President of Focus 1 Associates, LLC and...

Chief Compliance Officer Roundtable: Breakfast Briefing - February 7, 2018

When: February 7, 2018 Where: Blank Rome LLP | The Chrysler Building | 405 Lexington Avenue | New York, NY 10174 | 22nd Floor Boardroom | Phone: 212.885.5000 Schedule: 9:00-9:30am - Networking...

Upcoming Events - September & October 2017

Upcoming Events Don’t miss the opportunity to meet with us in person to discuss the topics that matter most to you. SEC3 is teaming up with industry experts in NYC to discuss...

May 23, 2017 - Webcast: WannaCry Ransomware: Were You Really Protected or Just L…

When: Tuesday, May 23rd, 2017 | Schedule: 12pm - 1pm EST Who: Paul Caiazzo, CEO and Co-Founder, TruShield Security Solutions Michael Brice, Founder, BW Cyber Services John Lukan, Managing Director, SEC Compliance Consultants, Inc. We...

June 14, 2017 - Compliance Breakfast Briefing

8:30-9:00am - Networking and Continental Breakfast 9:00-10:30am - Program Location: Willkie Farr & Gallagher LLP | 600 Travis Street | Suite 2310 | Houston, TX Barry Barbash from Willkie Farr & Gallagher LLP,...

June 13, 2017 - Compliance Breakfast Briefing

8:30-9:00am - Networking and Continental Breakfast 9:00-10:30am - Program Location: Haynes and Boone, LLP | 2323 Victory Avenue | Suite 700 | Dallas, TX 75219 Validated parking is available in the garage attached...

May 31, 2017 - Chicago

9:00-9:30 a.m - Networking and Continental Breakfast 9:30-11:00 a.m - Program Location: Baker & McKenzie LLP | 300 East Randolph Drive | Suite 5000 | Chicago, IL 60601 Kristin Gonzalez and Jerome Tomas...

May 17, 2017 (NYC WIMF)

This event is by invitation only. Please email info@seccc.com to learn more.

May 15, 2017 (NYC Chief Compliance Officer Roundtable)

9:00-9:30am - Networking and Continental Breakfast 9:30-11:00am - Program Location: Blank Rome LLP | The Chrysler Building | 405 Lexington Avenue | New York, NY 10174 | 22nd Floor Boardroom | Phone:...

Webcast: The Most Insidious Cybersecurity Threat Is Also The Least Understood

When: Tuesday, April 25th | Schedule: 12pm - 1pm EST Who: Paul Caiazzo, CEO and Co-Founder, TruShield Security Solutions Michael Brice, Founder, BW Cyber Services John Lukan, Managing Director, SEC Compliance Consultants, Inc. Ransomware, the...

CCO Liability (Part III): Managing Liability Webinar

In this webinar, panelists discuss indemnifications and insurance as potential remedies to address the direct financial risks to a CCO. Attendees will learn: What terms and conditions should Chief Compliance Officers be...

Webinar: CCO Liability (Part III): Managing Liability: Navigating Indemnities an…

When: Tuesday, February 21, 2017 Schedule: 11:00am ET / 10:00am CT / 9:00am MT / 8:00am PT / 7:00am AT Description of Webinar: The National Society of Compliance Professionals is pleased to host...

Webcast: SEC 2017 Examination Focus Area – Cybersecurity Testing

Penetration Testing & Vulnerability Assessments - Examining the SEC & FINRA Requirements When: Wednesday, January 25th | Schedule: 12pm - 1pm EST Who: Paul Caiazzo, CEO and Co-Founder, TruShield Security Solutions Michael Brice, Founder,...