The SEC’s Office of Compliance Inspections and Examinations (OCIE) released an industry letter today directed at senior executives and principals of firms that are newly registered as investment advisers as a result of the Dodd-Frank Act. As a reminder, the Dodd-Frank Act repealed the “private adviser exemption” in the Investment Advisers Act of 1940 and implemented a new exemption that applies to firms that advise only private funds and have assets under management of less than $150 million (highlights of our prior coverage here, here, and here). As a result, many previously exempt investment advisers are being forced into SEC registration.
The letter provides an introduction to the National Exam Program, or NEP (the examination arm of the OCIE), and explains the “Presence Exam” initiative, under which NEP staff will conduct “focused, risk-based examinations” of newly registered advisers to private funds over the course of the next two years. The Presence Exam initiative consists of three phases: Engagement, Examination, and Reporting.
Engagement: The first phase of the program is described as a “nationwide outreach to inform newly registered firms about their obligations” under the Investment Advisers Act of 1940 and related rules, and to make firms more familiar with NEP and OCIE. In connection with the outreach initiative, the letter refers to various resources and materials available on the SEC’s website, such as the Information for Newly-Registered Investment Advisers page. You can find additional materials here, under the heading “Investment Adviser Regulation.”
Examination: Firms that are selected for examination will receive a visit from the NEP for an on-site examination focused on higher-risk areas of the investment adviser business. Several of the areas of the business that OCIE considers “higher-risk” are described in the letter, along with information about the focus of examinations on particular topics. Here is a sampling:
Marketing –evaluation of whether the adviser has made false or misleading, manipulative, or fraudulent statements in its advertising materials
Portfolio Management – evaluation of a firm’s decision making processes with respect to topics such as allocation of investment opportunities
Conflicts of Interest – evaluation of the procedures and controls a firm uses to identify, mitigate, and manage conflicts of interest in areas such as allocation of investments, fees and expenses, outside business activities and personal securities trading, and transactions with affiliated parties
Reporting Phase: At the conclusion of the two-year initiative, the NEP will report findings to the SEC and the public, describing common issues, problems, and trends that were identified through its Presence Exams of newly registered investment advisers.
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