New Areas of Focus by SEC Staff during Investment Adviser Examinations

November 07, 2008

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During a recent speech to the National Society of Compliance Professionals, an official of the U.S. Securities and Exchange Commission (“SEC”) identified certain new areas of focus by the SEC examination staff due to these volatile markets.

Based upon this unofficial guidance by an SEC official, the following are some new questions that your registered investment adviser should address in light of recent events.

  • Portfolio Management – Are the portfolio managers of your registered investment adviser trading more aggressively to make up recent performance losses? Are the written investment objectives of your clients consistent with the investment strategies currently utilized in your clients’ accounts?
  • Financial Controls – Is your registered investment adviser in a precarious financial position that hasn’t been disclosed to your clients?
  • Valuation – Do your investment advisory clients know the current fair market value of their investments? If using a broker’s quote or pricing service, does your registered investment adviser understand and has it disclosed to the client whether the quote or price is based upon an actual transaction or another methodology? Does your registered investment require the use of multiple pricing sources for difficult to price securities?
  • Sales of Structured Products – Does your registered investment adviser adequately disclose all of the risks associated with such products?
  • Controls at Acquired/Merged Investment Adviser – If your registered investment adviser merges with or acquires another investment adviser, has your investment adviser taken steps to ensure compliance controls and processes are implemented at the acquired/merged investment adviser?
  • Money Market Funds – Have you evaluated whether the portfolios of the money market funds of your clients are credit worthy? Are your clients utilizing money market funds that are stretching too far for returns with undisclosed risk?
  • Short Selling – If your registered investment adviser is presently a 13F filer, has it filed a Form SH for any opened or closed short position? Is your registered investment adviser utilizing false or misleading information to manipulate prices of securities?
  • Acts of Desperation – Is your registered investment adviser concealing losses, inflating revenues/profits or avoiding the delivery of bad news? Is your investment adviser’s chief compliance officer reminding your investment adviser’s associated persons of their ethical obligations during these challenging periods?

The SEC examination staff also will be focusing upon other compliance risks facing investment advisers that we’ve previously discussed. Please click here for more information these other areas of focus.

In the event that your registered investment adviser is preparing to conduct its annual review of its compliance policies and procedures before the end of the year, RIA Compliance Consultants would encourage your firm to address these particular questions as part of its annual review.

If you need assistance in reviewing and assessing your registered investment adviser’s compliance program pursuant to SEC Rule 206(4)-7, please enroll in our webinar, “Conducting an Annual Review,” scheduled for Thursday, November 13, 2008 from 12:00 p.m. to 1:00 p.m. CST.

In order to participate in this one-hour webinar, you will need to purchase a seat by paying a registration fee of $59.95 to RIA Compliance Consultants. You can start the webinar registration process by clicking below. Please contact Annie Dilocker with RIA Compliance Consultants at 877-345-4034 in order to process your credit card payment for the registration fee.

Posted by Bryan Hill
Labels: SEC Inspection