On February 19, 2014, the SEC announced that the Office of Compliance Inspections and Examinations (“OCIE”) launched an initiative under the National Exam Program (the “NEP”) to exam “never-before examined” Registered Investment Advisers. Impacted firms should have received written notification from the SEC on that date regarding this new initiative.
The new initiative through the NEP, the “Never-Before Examined Initiative,” focuses on investment advisers that have never previously been examined, with an emphasis on those that have been registered three years or more. The Never-Before Examined Initiative includes two approaches: riskassessment and focused reviews. The risk-assessment approach involves a high-level review of an adviser’s overall business activities, with an emphasis on review of the compliance program and representations made on disclosure documents. The focused review approach includes comprehensive, risk-based examinations of one or more of the following areas:
- Compliance Program- NEP will review the advisory books and records to determine if an adviser has identified conflicts of interest and compliance-related risks, adopted appropriate policies and procedures to mitigate and manage conflicts and risks, and empowered a competent Chief Compliance Officer to administer the compliance program.
- Filings/Disclosure- NEP will analyze the adviser’s filings and disclosure documents to assess the content and scope of disclosures made to ensure that it includes all material facts regarding conflicts or potential conflicts of interests. These filings include the adviser’s offering documents, Form ADV, Form PF, Form D and Section 13 filings, among others.
- Marketing- NEP will review marketing materials to determine whether the adviser has made false or misleading statements about its business or performance record, untrue statements of material fact, omitted material facts, any statement that is otherwise misleading, or engaged in any manipulative, fraudulent, or deceptive activities.
- Portfolio Management- NEP will review an adviser’s portfolio decision-making practices, including the allocation of investment opportunities and whether the advisor’s practices are consistent with disclosures to clients to ensure that the adviser is acting in the best interests of its clients.
- Safety of Client Assets- NEP will review an adviser’s compliance with the Advisers Act and other applicable to ensure that advisers who have “custody” of its clients’ assets are protecting those assets from loss or theft. Note that in March 2013, the NEP published a Risk Alert, sharing observations regarding the most common issues of non-compliance, finding that almost one-third of recent exams resulting in significant deficiencies included custody-related issues.1
After an examination, a letter will be provided to the adviser indicating that the examination has concluded without findings or indicating that deficiencies were identified and corrective measures are needed. If serious deficiencies are found, NEP staff may refer the deficiencies to the SEC’s Division of Enforcement or other regulator for possible action.
SEC-registered investment advisers should be prepared to undergo an examination in the next 12 months. Firms should, as a part of their regular testing, evaluate whether their compliance programs and books and records (among other things) are in order. Firms should also review disclosure documents, marketing materials and regulatory filings to ensure consistency. These have proven to be a focus of examinations in the past year.