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Securities Compliance Sentinel Analysis of cutting-edge securities industry issues

RIAS NEED TO BE PREPARED FOR “PRESENCE” EXAMS

Posted in Hedge and Private Equity Funds, Investment Adviser Regulation, SEC Enforcement

The SEC’s Office of Compliance Inspections and Examinations (“OCIE”) issued a release directed to newly registered investment advisers (“RIAs”).  The release was a “hello” to these RIAs to make them aware of the National Exam Program (“NEP”) and explain the Presence Exams Initiative (“PEI”).  An RIA is “newly registered” if it registered with the SEC after the Dodd-Frank Act became effective.

The OCIE has indicated that the NEP staff will contact the RIA if it is to be examined.  The “focused, risk-based examinations” of RIAs will be conducted over the next 2 years, and will consider engagement, examination and reporting.  The engagement phase is essentially, an outreach program to inform RIAs about their obligations under the Investment Advisers Act of 1940, including, but not limited to, the SEC’s policies.

            The examination phase is the actual on-site review conducted by a NEP Staff member that will review one or more higher-risk areas of the RIAs’ business and operations.  The OCIE Staff may consider, among other things:

l      Marketing, marketing materials, and the solicitation of investors.

l      Portfolio management and the portfolio decision-making policies.

l      Conflicts of interest, concerning investment, fee and expense allocation, sources of revenues and transactions with related parties.

l      Safety of client assets, loss or theft prevention programs for client and assets, and a review of independent private fund audits.

l      Valuation, policies and procedures, illiquid or difficult to value instruments, fair valuation, calculating management and performance fees, and expense allocations.

Initially, the Staff will report their finding to the SEC and the public, focusing on common practices, industry trends and significant issues. 

RIAs (and fund managers) should be prepared to answer all SEC Staff inquiries concerning valuation methodology, marketing materials, and custody of assets, among others.  Thus, RIAs must start now preparing for these exams, and ensuring proper books and records.