The SEC’s Office of Compliance Inspections and Examinations (OCIE) announced this week that its National Exam Program (NEP) launched an initiative to “engage with” investment advisers that have never been examined by the SEC. Advisers to private funds that registered after the implementation of the Dodd-Frank Act, and which are subject to the NEP’s presence exam initiative, are excluded from this new initiative.
The staff said that the new initiative will focus on advisers that have been registered three years or more, and will take the form of either risk assessments or focused reviews. The risk assessments will generally focus on an adviser’s compliance program and “other essential documents” that will enable examiners to assess representations made in an adviser’s disclosure documents, such as the Form ADV.
The focused review, which reflects the staff’s 2014 examination priorities (see our related client alert), will be a comprehensive review of one or more the following areas that the NEP staff considers to be “higher risk”:
- Compliance Program. Compliance programs adopted by an adviser under Rule 206(4)-7 must be reasonably designed to prevent violations of the Investment Advisers Act. Among other things, the staff will assess whether an adviser has empowered a competent CCO to administer its compliance program.
- Disclosure. An adviser’s filings and disclosure documents must contain all material facts regarding conflicts of interest so that clients can determine if they want to enter into or remain in an advisory relationship. The NEP staff will take a deep dive into advisers’ disclosure documents, including the Form ADV.
- Marketing. The NEP staff will consider whether, among other things, an adviser’s marketing materials include false or misleading statements about its business or its performance history. Advisers are reminded that Rule 206(4)-1 under the Advisers Act precludes an adviser from including in its advertisements any untrue statement of material facts or omitting material facts.
- Portfolio Management. The NEP staff may review and evaluate an adviser’s portfolio decision-making practices. Specifically, this may include a review of allocations and whether the adviser is acting in a manner consistent with the disclosure it has given clients.
- Custody. The NEP will examine whether advisers that have custody of client assets are taking appropriate measures to protect such assets from loss or theft.
OCIE said that it will not examine each adviser that receives its letter. It also makes it clear, however, that NEP may refer any deficiencies it finds to the SEC’s Division of Enforcement or to state or other regulatory agencies for possible action.
In addition to the examination initiative, NEP also announced an outreach program for never-before examined advisers. The NEP staff will conduct regional meetings to help these adviser learn more about the examination process.
The new initiative should not surprise investment advisers, since the NEP staff previously announced that examining these advisers would be one of its priorities in 2014. All advisers – but specifically those that have been in existence for more than three years and have not yet been examined – should review their compliance policies and procedures in light of this initiative and NEP’s stated 2014 priorities. The time to do that is now, not after the NEP staff announces a visit.