SEC Releases Exam Priorities
The staff of the National Examination Program of the SEC’s Office of Compliance Inspections and Examinations has published its examination priorities “to communicate with investors and registrants about areas that are perceived by the staff to have heightened risk.” For investment advisers and funds, the staff highlighted the following issues: asset verification and custody including surprise exams and qualified custodians; undisclosed compensation arrangements either paid to an adviser from a product or paid by an adviser to a third party solicitor; performance reporting/advertising including aberrational performance claims and the accuracy of calculations; allocation of investment opportunities especially where advisers manage assets subject to a performance fee side-by-side with other clients; and fund governance including disclosure to fund boards and board oversight of service providers. The staff also identified new and emerging issues of focus: private equity and hedge fund managers newly registered because of Dodd-Frank; how dually registered firms decide whether to provide brokerage or advisory services; and the growing use of alternative products in registered fund structures. The staff makes clear that the priorities listed “are not exhaustive” but that the “NEP expects to allocate a significant portion of its resources throughout 2013 to the examination” of these issues.
OUR TAKE: Compliance personnel should share this publication with senior management so that they understand the importance of these issues. Also, firms should re-assess these topics before the SEC arrives for an exam.