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Assessing Never-Examined SEC-Registered Investment Advisers: An SEC NEP Priority

By Shelley Rosensweig and Beth Smigel, Tannenbaum Helpern Syracuse & Hirschtritt,
Tuesday, April 15th, 2014

The following article is part of our Emerging Managers Insight Article Series and was contributed by Tannenbaum Helpern Syracuse & Hirschtritt. Read more articles from the Series HERE.

Shelley RosensweigOn January 9, 2014, the Office of Compliance Inspections and Examinations (“OCIE”) of the Securities and Exchange Commission (the “SEC”) published its 2014 examination priorities for its National Exam Program (“NEP”).   While the examination priorities include multiple areas that OCIE believes are higher-risk areas of the business and operations of investment advisers, this article focuses on the NEP’s initiative (the “Initiative”) to conduct focused, risk-based examinations of investment advisers who have been registered with the SEC for at least three (3) years (including non-U.S. advisers) but have not yet been examined by the NEP and are not subject to the “Presence Exam” initiative discussed herein (“Covered Advisers”). 

Beth SmigelThe examinations conducted by the NEP in accordance with the Initiative focus on two approaches.  The first approach consists of risk-assessment reviews which allow the NEP to obtain a better understanding of each Covered Adviser and include a high-level review of the Covered Adviser’s overall business activities, with a particular focus on the compliance program and other essential documents needed to assess the representations made on the Covered Adviser’s disclosure documents.  The second approach utilizes focused reviews which emphasize certain high risk areas of the Covered Adviser’s business and operations, including the following:

  • Compliance Program: NEP staff will examine the Covered Adviser’s compliance program and the effectiveness of such program (including a review of its books and records, even such records existing prior to such Covered Adviser’s registration with the SEC) to determine if a Covered Adviser has adequately identified conflicts of interest and compliance-related risks, adopted appropriate policies and procedures to mitigate and manage those conflicts and risks, and empowered a competent chief compliance officer to administer the compliance program;
     

  • Filings/Disclosure:  NEP staff will review the Covered Adviser’s filings and disclosure documents to assess the content and scope of disclosures that have been made therein (in particular whether conflicts of interest and potential conflicts of interest have been adequately disclosed); 
     

  • Marketing:  NEP staff will review the Covered Adviser’s marketing materials and evaluate whether a Covered Adviser has made false or misleading statements about its 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 in such marketing materials;
     

  • Portfolio Management:  NEP staff will review and evaluate the Covered Adviser’s portfolio decision-making practices, including the allocation of investment opportunities and whether the Covered Adviser’s practices are consistent with disclosures provided to clients; and
     

  • Safety of Client Assets:  NEP staff will review a Covered Adviser’s compliance with the relevant provisions of the Investment Advisers Act of 1940, as amended (the “Advisers Act”) and other applicable laws that are designed to prevent loss or theft of client assets.
     

Hedge Fund Article SeriesThe SEC specifically excludes registered investment advisers to private funds from the Initiative, as those advisers are subject to examination pursuant to the SEC’s “Presence Exam” initiative launched in October 2012.  The Presence Exam program focuses on newly registered private fund investment advisers that registered with the SEC as of July 21, 2011, the date when the definitional rules under Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 became effective (which, among other things, removed the “less than 15 clients” exemption from SEC registration on which most private fund advisers previously relied).  It is worth noting for those advisers to private funds subject to Presence Exams that the five (5) key focus areas (some of which overlap with those mentioned above) are the adviser’s marketing, portfolio management, conflicts of interest, safety of client assets and valuation procedures.

Covered Advisers should anticipate being examined by the SEC pursuant to the Initiative.  To prepare for such exams, compliance officers of Covered Advisers are encouraged to review their compliance policies and procedures to ensure that such procedures (i) adequately address the foregoing matters, (ii) are in compliance with the Advisers Act and SEC guidance and (iii) accurately reflect the operations of the Covered Adviser.   Covered Advisers should also ensure that disclosures made to its clients are consistent across all of its disclosure materials including ADV filings, offering and related documents, client agreements and marketing materials.  We note that OCIE indicated its intention to invite Covered Advisers to attend regional meetings later in 2014 where they can learn more about the examination process. 

As the SEC’s Division of Enforcement has the ability to bring charges against a Covered Adviser based on deficiencies discovered by OCIE in the course of examination, Covered Advisers should consider meeting with their legal advisors to better understand what to expect during the examination process and how best to prepare.

If you have any questions regarding this update, please contact Shelley Rosensweig at 212-508-6774 or Beth Smigel at 212-702-3176.

Come back Thursday for the next Emerging Managers article or subscribe to Hedge IT and have it delivered to your inbox.


About the Authors

Shelley Rosensweig is a partner in the Financial Services, Private Funds and Capital Markets department at Tannenbaum Helpern Syracuse & Hirschtritt LLP.  Shelley advises clients regarding matters which include design, structure and operation of US and non-US investment funds and portfolios, distribution and marketing issues as well as commodities, futures and derivatives issues. Shelley also advises and assists clients with regard to seeding arrangements, managed account platforms and the organization of joint ventures. Further, Shelley advises investment advisory clients regarding investment products and services, SEC, FINRA, CFTC and blue sky regulatory and compliance matters, as well as trading issues and employment matters.

Beth Smigel is partner in the firm's Financial Services, Private Funds and Capital Markets department at Tannenbaum Helpern Syracuse & Hirschtritt LLP. Beth's practice includes forming and structuring domestic and offshore private investment funds (including hedge funds and private equity funds) and advising with respect to ongoing operational and U.S. regulatory matters for the funds. In addition, Beth advises U.S. and non-U.S. investment advisers with respect to registration (and exemptions therefrom) under the U.S. Investment Advisers Act of 1940 and compliance matters arising thereunder, including assisting in preparation of compliance manuals and code of ethics. Beth also counsels investment advisers, fund operators and investment funds with regard to various U.S. regulatory matters, including those arising under the U.S. Securities Act of 1933, the U.S. Investment Company Act of 1940, the Commodity Exchange Act as well as SEC, FINRA, NFA and CFTC compliance and registration issues.

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