Setting the Stage for 2014: SEC Announces Exam Priorities


Setting the Stage for 2014: SEC Announces Exam PrioritiesPay attention to this one.  Earlier this month, the SEC Office of Compliance Inspection and Examination issued its annual list of 2014 examination priorities for a variety of financial institutions including investment advisers/mutual funds, broker-dealers, exchanges and self-regulatory organizations and clearing/transfer agents.

This post focuses on investment advisers.  I would strongly recommend that you read this, the full SEC release and do your homework, especially if it has been a while since your last exam or if 2014 might become your first year ever.

The SEC identified six market-wide issues across the entire SEC national examination program:

  • Fraud detection and prevention;
  • Conflicts of interest and legal/ compliance/financial/operational risks (including an evaluation of the “tone at the top”);
  • Governance and supervision of IT systems, operational capability, market access, information security, and business continuity/disaster recovery programs;
  • Risks presented by businesses that are dually registered as broker-dealers and investment advisers;
  • New laws and regulations, principally Rule 506(c) and crowd-funding; and
  • Issues arising from retirement vehicles and rollover accounts.

For investment advisers, the SEC listed as priorities for the 11,000 investment advisers under its purview:

  • Safety of client assets and custody rule; to refresh your recollection, the SEC has issues its dissatisfaction with the state of the nation in a Risk Alert in 2013, which I strongly recommend you read as well;
  • Conflicts of interest inherent in some advisers’ business model.  Specific examples: compensation arrangements, allocation of investment opportunities, risk controls, especially for illiquid and leveraged products and higher risk products targeted to retail investors;
  • Marketing/performance, particularly hypothetical and back-tested performance advertising, performance record keeping and compliance oversight of marketing;
  • Wrap fee programs, particularly associated conflicts of interest, best execution and disclosures; and
  • Payments made by managers to distributors and intermediaries.

The list is not exhaustive.

On a separate note, now may also be a good time for your annual review, which I will cover in a separate post this month so stay tuned for it.   You are probably also already thinking about your Form ADV amendment that is due at the end of this quarter.

Get a head-start for smooth sailing.  

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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