On January 9, 2014, the Office of Compliance Inspections and Examinations (“OCIE”) National Examination Program (“NEP”) of the U.S. Securities and Exchange Commission (“SEC”) published its examination priorities for 2014. This report is published to “communicate with investors and registrants about areas the that the staff perceives to have heightened risk and to support the [SEC] mission to protect investors; to maintain fair, orderly, and efficient markets; and to facilitate capital formation.”
The NEP’s examination priorities address areas that are relevant to the entire market and issues that are specific to particular business models and organizations. The release indicates that the most significant initiatives across the entire NEP include:
- Fraud Detection and Prevention
- Corporate Governance, Conflicts of Interest, and Enterprise Risk Management
- Technology
- Dual Registrants
- New Laws and Regulations
- Retirement Vehicles and Rollovers
The areas that the NEP will focus on that are specific to investment advisers and investment companies include:
- Safety of Assets and Custody
- Conflicts of Interest Inherent in Certain Investment Adviser Business Models
- Compensation arrangements, with particular focus on undisclosed compensation arrangements and their effect on recommendations made to clients
- Allocation of investment opportunities
- Controls and disclosures associated with side-by-side management of performance-based and purely asset-based fee accounts
- Risk controls and disclosure, particularly for illiquid investments and leveraged investment products and strategies
- Higher risk products or strategies targeted to retail (and especially retired or elderly) investors
- Marketing/Performance
- Never-Before Examined Advisers
- Wrap-Fee Programs
- Quantitative Trading Models
- Presence Exams
- Payments for Distribution in Guise
- Fixed Income Investment Companies
- Money Market funds
- “Alternative” Investment Companies
- Securities Lending Arrangements
It is important to keep in mind that the NEP’s examination priorities list is not exhaustive of all areas that may be covered during an examination. While examination priorities may focus primarily on issues and business practices that are perceived by the OCIE staff to present the highest risks to investors and the integrity of the market, exam scopes will vary from investment adviser to investment adviser. The actual scope and focus of an exam will be affected by the investment adviser’s business activities and the risks associated with those activities.
All registered investment advisers, especially those that have never been examined, need to make sure that they are ready at all times for the examiner to come knocking on their door. Although the examination priorities list pertains specifically to SEC registered investment advisers, many of these topics will apply regardless of whether your investment adviser is registered with the SEC or a state securities regulator. Every investment adviser should review these areas closely and make sure that they are properly addressed in the investment advisers’ compliance programs and disclosures to clients.
RIA Compliance Consultants will be presenting a webinar, “Preparing for a Regulatory Exam,” on February 20, 2014 at 12:00 p.m. CST. Click here now to purchase and register for this webinar if you would like to learn more about the SEC’s examination priorities and some tips on how you can make sure you are ready at all times for a regulatory examination.
Posted by Bryan Hill
Labels: Enforcement, Examination, SEC, SEC Inspection
