Category Archives: Regulatory Inspections

SEC to Conduct Presence Exams for Newly Registered Investment Advisers

March 06, 2013

In a release issued by the SEC on October 9, 2012, the U.S. Securities and Exchange Commission (“SEC”) announced “Presence Exams” for certain newly-registered investment advisers (investment advisers registered after July 21, 2011). The presence exams are to be conducted by SEC’s Office of Compliance Inspections and Examinations (“OCIE”) through the new National Exam Program (“NEP”) initiative. These “focused, risk-based examinations” will be conducted of investment advisers to private funds registered with the SEC.  These Presence Exams will take place over a two-year period and have three primary phases:

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Investment Adviser Examination Improvement Act of 2012 Introduced

July 26, 2012

Representative Maxine Waters (D – CA) introduced the Investment Adviser Examination Improvement Act of 2012 (“Investment Adviser Examination Improvement Act”) on July 25, 2012. The Investment Adviser Examination Improvement Act enables the U.S. Securities and Exchange Commission (“SEC”) to charge user fees from investment advisers. The Investment Adviser Examination Improvement Act is a response to the Dodd-Frank Wall Street Reform and Consumer Protection Act which requested more stringent and frequent examination of investment advisers.

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Investment Advisors Should Prepare for Increased Regulatory Examinations

March 21, 2012

By now, registered investment advisors affected by the changes to Rule 203A-5 under the Investment Advisers Act of 1940 (“Rule 203A-5”), mid-sized investment advisor firms (firms with assets under management between $25 million and $100 million), should have begun the process of switching from registration with the U.S. Securities and Exchange Commission (“SEC”) to state registration.  Mid-sized advisor firms making the switch must keep in mind that filing the Form ADV Part 1 amendment and submitting an application for registration with the appropriate state regulatory agencies is just the first step in the process of making the switch from SEC to state registration.  A registered investment advisor must familiarize itself with the regulatory requirements of the SEC or state securities regulators, as applicable, and make sure that appropriate procedures are in place for complying with these requirements.  For a mid-sized advisor this will mean reviewing and making sure that it is complying with the appropriate state rules and regulations versus those of the SEC.

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Investment Advisers Should Expect More Frequent Regulatory Exams

September 13, 2011

With the upcoming regulatory switch of mid-sized investment advisers from the U.S. Securities and Exchange Commission (“SEC”) to state securities regulators and Congress considering whether to authorize a self-regulatory organization (“SRO”) for investment advisers, we believe that the frequency of investment adviser examinations is going to rise.

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The Benefits of Being Prepared for a Regulatory Examination

September 09, 2011

The best approach for an investment adviser firm to prepare for a regulatory examination begins with ongoing compliance training. A report released by the U.S. Securities and Exchange Commission (“SEC) on February 2011, stated “In most cases, the staff considers the quality of the [investment adviser’s] compliance systems and its internal control environment when determining the scope of the examination and the areas to be reviewed.” Investment advisers with a vigorous compliance program, including training and preparing for regulatory examinations, will find that regulatory audits are more likely to progress smoothly. Investment adviser firms that fail to demonstrate a solid understanding of their investment adviser’s compliance program will likely leave the securities regulator with concerns that the investment adviser is failing to protect the safety of its client’s assets. The examiners may deem it necessary to seek further information and request additional documentation from the investment adviser. Failure to provide requested documentation and a display of an inadequate compliance program will likely be the result of a deficiency letter, and/or remedial or enforcement action against your investment adviser firm. In the same report discussed above, the SEC has stated that unfortunately, “most examinations conclude with a deficiency letter.”

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Would Your Registered Investment Adviser be Prepared for a Regulatory Exam?

August 30, 2011

With the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), mid-sized investment adviser firms (firms with assets under management between $25 million and $100 million in assets under management) will now be required to switch from federal to state regulation.  One of the anticipated outcomes resulting from this change that should be notice by all registered investment advisers is more frequent regulatory examinations.  As stated by the North American Securities Administration Association (“NASAA”), “Firms switching to state regulation for the first time can expect thorough inspections generally on a more frequent basis than they may have had experienced before. Most advisers should find that thorough inspections and strong internal compliance benefit customer and firm alike.”  Additionally, in a study conducted by the staff of the U.S. Securities and Exchange Commission (“SEC”) under the requirements of Section 914 of the Dodd-Frank Act, released January, 2011, it was indicated that, “The Staff expects that the frequency of examinations of registered investment advisers could increase following the effective date of Title IV as a result of a substantial decrease in the number of registered investment advisers, many of whom will transition from federal to state registration.”

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SEC Publishes July 2008 ComplianceAlert

July 22, 2008

Today, the U.S. Securities and Exchange Commission (SEC) released its July 2008 ComplianceAlert letter which identifies and describes common deficiencies and weaknesses that SEC examiners have found during compliance examinations of SEC registered investment advisers/mutual funds, broker-dealers, and transfer agents. The release, which is considered official comment from the SEC’s Office of Compliance Inspections and Examinations and other select SEC department staff, provides valuable guidance for registered investment advisors trying to navigate the regulatory maze. In the release, the SEC provides guidance on four major areas: (1) personal trading by advisory staff; (2) proxy voting and funds’ use of proxy voting services; (3) valuation and liquidity issues in high yield municipal bond funds; and (4) soft dollar practices of investment advisors.

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One-Day Audits Being Conducted on Newly Registered SEC Investment Advisers

May 22, 2008

The U.S. Securities and Exchange Commission (SEC) has been examining certain recently registered investment advisers by conducting limited scope, one-day examinations. According to the SEC’s cover letter sent in advance of these audits, “the purpose of these examinations is to assess and discuss important risk areas presented be the registered investment advisers’ operations and the related compliance policies and procedures implemented by the registered investment advisers to manage those risks.”

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Lori Richards Provides Insight to SEC Exam Focus

May 05, 2008

On March 20, Lori Richards, Director – SEC’s Office of Compliance Inspections and Examinations, delivered a speech explaining the SEC’s current registered investment advisor examination priorities. The speech highlights the “top 10” areas of focus during routine examinations. While not an official statement from the SEC, Ms. Richards’ speech provides excellent insight into the current mindset of the SEC Office of Compliance Inspections and Examinations.

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