The Private Investment Funds Subcommittee of the New York State Bar Association recently organized a meeting on the Securities and Exchange Commission’s (“SEC”) risk-based examination program. The meeting was led by Andrew Bowden, the Head of the Investment Advisers National Examination Program of the SEC’s Office of Inspections and Examinations (“OCIE”) and was co-presented by Janaya Moscony, the President of SEC Compliance Consultants, Inc. (“SEC3”) and Barry Barbash, the head of the investment management group of Willkie Farr & Gallager and a former Director of the SEC’s Division of Investment Management.
Mr. Bowden confirmed what was said by Carlo di Florio at the Gaim OPS conference in the Cayman Islands regarding a series of limited-scope exams of newly registered advisers scheduled to start in the fall. Mr. Bowden said that two regions are currently testing the new exam program that will be deployed in the fall. These exams will not be “top to bottom exams” but they will instead target specific areas of operations such as marketing and advertising. By conducting limited scope exams instead of full-scope exams, the SEC is expecting to examine a larger number of advisers. The SEC will also examine some low-risk advisers in order to verify they are in fact low risk. After conducting these limited-scope exams, the SEC will report back to the industry regarding its findings and common areas of deficiencies. Mr. Bowden confirmed that the SEC is still considering publishing its National Examination Manual in order to assist new registrants.
Sometimes the SEC will begin an examination of an adviser by performing an offsite review of its operations. This may may include a telephone call or sending to the adviser a short-form request list. The telephone call and the short-form list assist the SEC in conducting a risk-assessment of the adviser. After the telephone conversation and/or after reviewing the documents received on the basis of the short-form list, the SEC determines whether to pursue an onsite review of the adviser. Mr. Bowden added that sometimes an adviser undergoes an SEC review without even being aware. The SEC may specifically target advisers and remotely assess information submitted to the SEC along with information publicly available about such advisers. Given the additional information collected in ADV Part 1 and in Form PF, this is quite logical.
The panelists discussed the fact that the SEC is increasingly supplementing OCIE examination teams with enforcement personnel that are expected to expand their industry knowledge by participating in the exams with examiners. Mr. Bowden reported that this practice has not resulted in a higher number of referral cases which continues to be about 10% of industry participants examined. Cases typically referred to enforcement involve fraud or recidivism.
In responding to a question from the audience regarding the authority of the SEC to request pre-registration records, Mr. Barbash said that the SEC has had such authority given that the SEC had jurisdiction over advisers even prior to their registration in order to prevent, for instance, fraud. Another interesting observation by Mr. Barbash was the fact that the lack of a comprehensive compliance program could be considered “fraud” under the Investment Advisers Act since the Compliance Rule is part of the antifraud provisions of the Investment Advisers Act.
On the issue of examinations, Ms. Moscony commented that despite the fact that SEC exams are risk-based, examiners will likely have a hard time focusing on just high risk areas for fear of missing something important that may be categorized inaccurately as a lower risk area. Consequently, examiners may end up conducting broader-scope exams than intended and continue to have a hard time closing exams. Ms. Moscony also offered some tips on how to prepare for exams which can be found on our website along with two recent document request lists; a long-form and a short-form.
