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:
Engagement Phase: The engagement phase includes, outreach initiatives intended to inform newly registered investment advisers about their obligations under the Investment Advisers Act of 1940 (“Investment Advisers Act”). As part of the engagement phase, a focus on compliance outreach will be sought, including initiatives such as the Compliance Outreach Program where Chief Compliance Officers and other senior officers are given resources to learn about effective compliance practices through discussion forums.
Examination Phase: During the examination phase one or more of the following higher-risk business areas of the investment adviser will be reviewed:
- Marketing: Marketing materials may be reviewed to evaluate if the investment adviser has made any false or misleading statements about the investment adviser’s business or performance record; made any untrue statement of a material fact; omitted material facts; made any statement that is otherwise misleading; or engaged in any manipulative, fraudulent, or deceptive activities. Additionally, a review will be performed of how the investment adviser solicits investors for the private funds the investment adviser manages, including the use of placement agents.
- Portfolio Management: A review and evaluation may be performed of the investment adviser’s portfolio decision-making practices, including the allocation of investment opportunities and whether the investment adviser’s practices are consistent with disclosures provided to investors.
- Conflicts of Interest: A review may be performed of the procedures and controls that the investment adviser uses to identify, mitigate, and manage certain conflicts of interest within the investment adviser. Some of the areas of conflicts of interest that may be reviewed include: allocation of investments, fees, and expenses; sources of revenue; payments made by private funds to advisers and related persons; employees’ outside business activities and personal securities trading; and transactions by advisers with affiliated parties.
- Safety of Client Assets: A review may be performed of the investment adviser’s compliance with the relevant provisions of the Investment Advisers Act and related rules designed to prevent the loss or theft of client assets. When applicable, a review may also be performed of the independent audits of private funds for consistency with the Investment Advisers Act custody rule.
- Valuation: A review may be performed of the investment adviser’s valuation policies and procedures, including the investment adviser’s methodology for fair valuing illiquid or difficult to value instruments. The review may also include the investment adviser’s procedures for calculating management and performance fees, and allocation of expenses to private funds.
Examinations will be conducted on-site. Upon completion of the on-site portion of the examination, the registered investment adviser may receive a letter indicating that the examination has concluded without findings or a letter that describes the deficiencies identified and notifies the investment adviser to take corrective actions. If more serious deficiencies are identified, the problems may be referred to the SEC’s Division of Enforcement, or to a self-regulatory organization, state regulatory agency or other regulator for possible action.
Reporting Phase: Upon completion of the Examination Phase, the NEP staff’s observations made, including common practices identified in the high-risk business areas, industry trends and significant issues found, will be reported to the SEC and the public. The goal of this phase is to encourage currently registered investment advisers to review their compliance in these areas and to promote improvements in investment adviser’s ongoing compliance programs.
An investment adviser should review its firms written compliance policies and procedures to make sure that the investment adviser has customized policies and procedures in place to address each of the higher-risk areas included as part of the Presence Exams. RIA Compliance Consultants has developed an online tool, RIA Express-Compliance Manual Drafter, to assist investment advisers with efficiently updating or developing their written policies and procedures, using this online tool, your investment adviser will complete a detailed questionnaire about your investment adviser’s personnel, business model, and changes in your procedures and practices. The answers to the online questionnaire will generate a customized written supervisory procedures and code of ethics manual, via our electronic compliance manual authoring wizard. By using this tool your investment adviser will be able to develop its initial written policies and procedures or an updated manual reflecting current regulations and revisions to your investment adviser’s existing policies and procedures. For just $695, an investment adviser can purchase a Self-Customized, Regulator Specific Manual that it will prepare using the RIA Express – Compliance Manual Drafter. To purchase this product or for more information about this project, please visit our online store here.
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.
Posted by Bryan Hill
Labels: Compliance Program, Examination, Newly-Registered Investment Advisers, Regulatory Exam, Regulatory Inspections, SEC
