The Securities and Exchange Commission’s National Examination Program (“NEP”) has released 2014 examination priorities which can be found here. Much of what has been announced is a reiteration of prior focus areas. NEP-wide initiatives (not specific necessarily to the particular type of registrant) include fraud detection and prevention; corporate governance; conflicts of interest; enterprise risk management; technology; dual registrants; new laws and regulations, including general solicitation of private funds under Rule 506(c) under the Securities Act of 1933; and retirement vehicles.
Notably, the NEP “will continue to meet with senior management and boards of entities registered with the SEC, including their affiliates where appropriate, to discuss how each firm identifies and mitigates conflicts of interest and legal, compliance, financial, and operational risks.” We have observed that examinations are increasingly focused on governance and include interviews with senior management to assess their awareness of compliance and regulatory matters, conflicts of interest and risk. According to the NEP, “This initiative is designed to: (i) evaluate firms’ control environment and ‘tone at the top,’ (ii) understand firms’ approach to conflict and risk management, and (iii) initiate a dialogue on key risks and regulatory requirements.”
The NEP discusses priorities by exam program area including Investment Adviser (“IA”) / Investment Company (“IC”) Exam Program, Broker Dealer (“BD”) Exam Program, Market Oversight Exam Program and Clearance and Settlement Exam Program.
The IA/ IC Exam Program divides priorities into core risks, new emerging issues and initiatives, and policy topics. Core risks listed for investment advisers and investment companies include safety of assets and custody, including instances where investment advisers fail to realize they have custody; conflicts of interest inherent in certain investment adviser business models (compensation, allocation of investments, side-by-side management of accounts with different fee structures, risk controls and disclosure); marketing and performance (hypothetical and back-tested performance, the use and disclosure of composite performance figures, performance record keeping, and compliance oversight of marketing).
New and emerging issues and initiatives include continued presence examinations of private fund advisers and examinations of never-before examined advisers; wrap fee programs; quantitative trading models; disguised payment for distribution; and fixed income investment companies. Policy topics appear to concentrate on registered investment companies and include money market funds, “alternative” investment companies and securities lending arrangements.
Please contact us should you wish to discuss the examination priorities and how they affect your firm.
