On February 21, 2013, the U.S. Securities and Exchange Commission (“SEC”) released its examination priorities for 2013 for the National Examination Program (“NEP”) of the Office of Compliance Inspections and Examinations. The release states that the NEP published these examination priorities to communicate with investors and SEC registered investment advisers about areas that are perceived by NEP staff to have heightened risk, and to support the SEC’s mission “…to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.” The 2013 examination priorities “…are aligned with the SEC’s mission by seeking to improve compliance, prevent fraud, inform policy, and monitor firm-wide and systemic risk.”
The SEC examination priorities “address issues that span the entire market, as well as issues that relate specifically to particular business models and organizations.” The examination priorities are outlined in greater detail in the SEC’s release; however, some of the key areas (identified as “market-wide” priorities) that apply to all SEC registrants, including registered investment advisers, investment advisers dually-registered as broker-dealers and investment companies, consist of the following:
- Fraud Detection and Prevention – seek to identify market participants engaged in fraudulent or unethical behavior;
- Corporate Governance and Enterprise Risk Management – assess overall risk management;
- Conflicts of Interest – review the overall risk governance framework firms have in place to manage conflicts of interest on an ongoing basis and focus on particular conflicts of interest, the steps registrants have taken to mitigate conflicts and the sufficiency of disclosure made to investors; and
- Technology – examine governance and supervision of information technology systems for topics such as operational capability, market access, and information security, including risks of system outages and data integrity compromises that may adversely affect investor confidence and seek to better understand operational information technology risks and identify methods that may potentially mitigate such risks.
The SEC release goes on to discuss risks faced by specific program areas of the NEP and states that focus areas are generally divided into “ongoing risks, new and emerging risks, and policy topics.” For investment advisers and investment companies, the release states that the scope of an SEC examination is generally limited to the issues and business practices of the investment adviser or investment company that the SEC examination staff perceives to present the highest risks to the investors and the integrity of the market. This typically means that the scope of SEC exams will vary from investment adviser to investment adviser. However, the following are some of the dominate areas that the SEC examination staff will consider “focus areas” when conducting examinations in 2013:
- Safety of Assets
- Safety of Assets
- Conflicts of Interest Related to Compensation Arrangements
- Conflicts of Interest Related to Allocation of Investment Opportunities
- Fund Governance
- New and Emerging Issues
- New Registrants
- Dually Registered Investment Adviser/Broker-Dealers
- “Alternative” Investment Companies
- Payments for Distribution in Guise
- Policy Topics
- Money Market Funds
- Compliance with Exemptive Orders
- Compliance with the Pay to Play Rule
In the SEC press release regarding the examination priorities, it was indicated that the priorities for investment advisers and investment companies include “presence exams for newly registered private fund advisers, and payments by advisers and funds to entities that distribute mutual funds.” The press release also states, “[t]he priority is not exhaustive and priorities may be adjusted throughout the year in light of ongoing risk assessment activities.”
Investment advisers should review the release to make sure they are familiar with the SEC exam priorities outlined and should take steps to make sure they are ready at all times for a regulatory exam. Investment advisers should perform periodic reviews and evaluations to determine how prepared they are for a regulatory examination. RIA Compliance Consultants has developed an online compliance tool, RIA Express – Compliance Review, that can help an investment adviser with the compliance review process. RIA Express – Compliance Review helps guide investment advisers through the process of reviewing the effectiveness of their investment adviser compliance program. For only $895, an investment adviser can purchase access to the RIA Express – Compliance Review tool that will take the investment adviser through a series of questions about the investment adviser’s disclosures, policies and procedures, and actual practices. Once the investment adviser completes the questionnaire a written findings report can be provided through the system to assist the adviser in determining and tracking any follow-up issues. Click here to schedule a time to speak with one of our senior compliance consultants about RIA Express – Compliance Review.
RIA Compliance Consultants will be conducting a complimentary webinar, “Preparing for a Regulatory Exam.” During this webinar, we will provide an overview of the regulatory examinations process for an investment adviser. Our consultants will discuss a variety of topics related to the investment adviser examination process like changes that have taken place over the past couple years; different types of investment adviser examinations, including the new “presence exams” for newly registered investment advisers; the type of information and documentation that may be requested during an investment adviser examination; and some of the common deficiencies found during the investment adviser examination process. The webinar will be presented on March 21, 2013 at 12:00 p.m. CST. Click here to register for this complimentary webinar.