Articles Tagged with Sec Exam Priorities

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The regulatory environment for SEC-registered advisers has become more complex as the result of a more aggressive and interconnected Securities and Exchange Commission (SEC). The connecting hub within the SEC is the Office of Compliance Inspection and Examination (OCIE), which serves as the “eyes and ears” of the SEC. The OCIE often is the first line of contact between an investment adviser and a potential referral to the SEC Enforcement Division’s Asset Management Unit (AMU), which is devoted exclusively to investigations involving investment advisers, investment companies, hedge funds and private equity funds.

The OCIE’s three main areas of focus for their 2015 exam priorities are (i) protecting retail investors, (ii) issues related to market-wide risks, and (iii) data analysis as a tool to identify registrants engaging in illegal activity.

Overlapping with the OCIE’s frontline examination role is the Compliance Program Initiative, which began in 2013 by sanctioning three investment advisers for ignoring problems within their compliance programs. The Compliance Program Initiative is designed to address repeated compliance failures that may lead to bigger problems. As such, any issues raised in a deficiency letter resulting from an examination are ripe for follow-up as the starting point of a subsequent examination. In the current regulatory environment—where violations of compliance policies and procedures can serve as the basis of enforcement actions—investment advisers and their compliance professionals need to pay close attention to the implementation, follow-through and updating of every aspect of their compliance program.

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Read this article and additional publications at pillsburylaw.com/publications-and-presentations.  You can also download a copy of the Client Alert.

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Pillsbury Winthrop Shaw Pittman LLP is pleased to present an exclusive client discount for the upcoming:

 Hedge Fund General Counsel and Compliance Officer Summit
October 19, starting at 8:00 a.m. through October 20, ending at 4:30 p.m. ET.
The University Club, New York, NY

Use Promotion Code HFPWSP for a 35% discount when registering.
Click Here to Register

Join us for our session:
“2015 Exam Priorities: Tips for Handling SEC Exams and Investigations”
taking place Tuesday, October 20, 2015, from 10:00 AM – 11:00 AM

 Discussion Leader:

Ildiko Duckor
Partner and Co-head, Investment Funds & Investment Management Practice,
Pillsbury Winthrop Shaw Pittman, LLP

 Speakers to Include:

 David Charnin, Managing Director, General Counsel and Chief Compliance Officer,
Strategic Value Partners, LLC

Sarah A. Good, Partner and Co-leader, Securities Litigation & Enforcement Team,
Pillsbury Winthrop Shaw Pittman, LLP

William H. Woolverton, Senior Managing Director and General Counsel,
Gottex Funds Management

Steven A. Yadegari, Chief Operating Officer and General Counsel,
Cramer Rosenthal McGlynn, LLC

   For more information Click Here

or contact Deborah Bernbaum at (212) 457-7918 or DBernbaum@alm.com
For registration inquiries, contact Frank Wolson at (212) 457-9510 or FWolson@alm.com

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Chair Mary Jo White’s opening remarks on July 15 kicking off the annual broker-dealer compliance outreach program drew a parallel between the goals and work of the SEC and those of compliance professionals. Ms. White acknowledged the challenges and hardship that compliance professionals face, the critical importance of their role to investors and the integrity of the markets. Her acknowledgment comes after the upset that compliance professionals experienced when BlackRock’s CCO was found personally liable and slapped with a civil penalty. (See our previous post regarding BlackRock’s censure and its compliance officer’s personal liability.) Ms. White’s assurance that “it is not our intention to use our enforcement program to target compliance professionals” was hedged by her statement that “we must, of course, take enforcement action against compliance professionals if we see significant misconduct or failures by them.”

Ms. White named the following examination priorities: fee structures; suitability; order routing conflicts; recidivist representatives; microcap activity; excessive trading; transfer agent activity; and issues of importance to retail investors and investors saving for retirement.

Read more of Chair Mary Jo White’s opening remarks at the Compliance Outreach Program for Broker-Dealers HERE.

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The Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (“OCIE”) recently released its annual examination priorities.  In 2015, OCIE will focus on three primary “themes” involving broker-dealers, investment advisers and transfer agents:

  1. Retail Investors – OCIE will look at important matters for retail investors and investors preparing for retirement including whether the products, advice, services and information being offered to them is consistent with current laws, rules and regulations;
  2. Market-Wide Risks – this is a broad theme which focuses on structural risks and trends involving whole industries or multiple firms; and
  3. Data Analytics – OCIE continues to increase its ability to analyze large amounts of data to identify registrants that may be conducting illegal activity.

Retail Investors – Advisers to retail investors and investors saving for retirement will be scrutinized by the SEC in 2015. The OCIE will assess fee selection where the adviser offers a variety of fee arrangements as well as reverse churning. Further, where advisers recommend moving retirement assets from employer-sponsored plans into other investments or accounts, OCIE will examine whether the sales practices used were improper or misleading. OCIE will also be reviewing the suitability of complex or structured products and higher yield securities and how well representatives in branch offices are being supervised by the home office.  The SEC may have an interesting opportunity to demonstrate whether it is serious in going after those who target seniors.

On February 5, 2015, SEC Commissioner Luis A. Aguilar and Investor Advocate, Rick A. Fleming, gave speeches at The American Retirement Initiative Winter Summit about advocating for investors saving for retirement and protecting elderly investors from financial exploitation.

Under the umbrella theme of “retail investors,” the OCIE will be assessing alternative investment companies and the focus of the exams will be (i) liquidity, leverage and valuation; (ii) the way the funds are marketed; and (iii) the internal controls, staffing, funding and empowerment of boards, compliance and back-offices. Mutual funds with material exposure to interest rate increases will be reviewed by OCIE to ensure they have the appropriate compliance policies and procedures and trading and investment controls in place to prevent their disclosures from being misleading and to be sure their investment and liquidity profiles are consistent with the fund’s disclosures.

Assessing Market-Wide Risks – The OCIE will focus in 2015 on structural risks and trends that involve whole industries or multiple firms. In collaboration with the Division of Trading and Markets and the Division of Investment Management, the OCIE will monitor the largest asset managers and broker-dealers. Through a risk-based approach, the OCIE will conduct annual examinations of all clearing agencies that have been designated systemically important. Furthering the OCIE’s 2014 efforts to examine the cybersecurity preparedness of registrants, 2015 will see a continuation of the initiative and an expansion of the initiative to include transfer agents. OCIE will also be looking into whether firms are giving priority to trading venues due to credits or payments for order flow, thus violating their best execution duties.

Data Analytics – The OCIE has made strides in developing data analytics that it can use to identify and examine firms and other registrants that may be engaged in fraudulent or illegal activity. The examination initiatives the OCIE will be using data analytics to examine include recidivists, microcap fraud, excessive trading and anti-money laundering.

Other Initiatives – Along with the primary themes discussed above, the SEC will continue to examine never-before examined investment advisers and newly registered municipal advisers. Advisers to private equity funds can expect to have their fees and expenses examined as a result of OCIE’s observed high rates of deficiencies. In addition to examining proxy advisory service firms, OCIE will also look at investment advisers’ compliance with their fiduciary duty to vote proxies on their investors’ behalf.

Advisers and broker-dealers should always be prepared for an SEC examination and ensure all written policies and procedures are in place and regularly audited for efficacy and compliance. Should you be subject to an examination, any deficiencies noted by the SEC should be addressed and rectified in a timely manner.

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The SEC’s Office of Compliance Inspections and Examinations (“OCIE”) recently released its Examination Priorities for 2015.  The priorities represent certain practices and products that OCIE believes present a potentially higher risk to investors and/or the integrity of the US capital markets.  In 2015, OCIE’s priorities focus on issues involving investment advisers, broker-dealers and transfer agents and are organized into three thematic areas:

  1. Examining important matters to retail investors and investors saving for retirement, such as whether the information, advice, products and services offered is consistent with applicable law.  Specifically, OCIE has identified the following examination priorities:
  • Fee Selection and Reverse Churning – Where an adviser offers a variety of fee arrangements, OCIE will focus on recommendations of account types and whether they are in the best interest of the client at the inception of the arrangement and thereafter, including fees charged, services provided, and disclosures made about such relationships.
  • Sales Practices – OCIE will assess whether registrants are using improper or misleading practices when recommending the movement of retirement assets from employer-sponsored defined contribution plans into other investments and accounts, especially when they pose greater risks and/or charge higher fees.
  • Suitability – OCIE will evaluate registered entities’ recommendations or determinations to invest retirement assets into complex or structured products and higher yield securities and whether the suitability of the recommendations or determinations are consistent with existing legal requirements.
  • Branch Offices – OCIE will focus on registered entities’ supervision of registered representatives and financial adviser representatives in branch offices, and attempt to identify branches that may be deviating from compliance practices of the firm’s home office.
  • Alternative Investment Companies – OCIE will continue to assess alternative investment companies and focus on: (i) leverage, liquidity and valuation policies and practices; (ii) factors relevant to the adequacy of the funds’ internal controls, including staffing, funding, and empowerment of boards, compliance personnel, and back-offices; and (iii) the manner in which such funds are marketed to investors.
  • Fixed Income Companies – OCIE will determine whether mutual funds with significant exposure to interest rate increases have implemented compliance policies and procedures and investment and trading controls sufficient to ensure that their funds’ disclosures are not misleading.
  1. Assessing issues related to market risks.  Specifically, OCIE has identified the following examination priorities:
  • Large Firm Monitoring – OCIE will continue to monitor the largest broker-dealers and asset managers to assess risks at individual firms.
  • Clearing Agencies – OCIE will continue to examine all clearing agencies designated as “systemically important” under the Dodd-Frank Act.
  • Cybersecurity – OCIE will continue to examine broker-dealers and investment advisers’ cybersecurity compliance and controls and expand these examinations to include transfer agents.
  • Potential Equity Order Routing Conflicts – OCIE will assess whether firms are prioritizing trading venues based on payments or credits for order flow in conflict with their best execution duties.
  1. Analyzing data to identify and examine registrants that may be engaging in illegal activity, such as excessive trading and penny stock, pump-and-dump schemes. Specifically, OCIE has identified the following examination priorities:
  • Recidivist Representatives – OCIE will continue to try to identify individuals with a history of misconduct and examine the firms that employ them.
  • Microcap Fraud – OCIE will continue to examine broker-dealers and transfer agents that aid and abet pump-and-dump schemes or market manipulation.
  • Excessive Trading – OCIE will continue to analyze data from clearing brokers to identify and examine brokers that engage in excessive trading.
  • Anti-Money Laundering – OCIE will continue to examine firms that have not filed suspicious activity reports (SARs) or provide customers with direct access to markets of higher-risk jurisdictions.

In addition, OCIE has identified other examination priorities for 2015, including:

  • Municipal Advisors – OCIE intends to examine newly registered municipal advisors to determine whether they comply with recently adopted SEC and Municipal Securities Rulemaking Board rules.
  • Proxy Services – OCIE intends to examine proxy advisory service firms and investment advisers’ compliance with their fiduciary duty in voting proxies on behalf of investors.
  • Never-Before-Examined Investment Companies – OCIE will conduct focused, risk-based examinations of registered investment company complexes that haven’t been examined before.
  • Fees and Expenses in Private Equity – this continues to be an area that OCIE is focused on.
  • Transfer Agents – OCIE intends to examine transfer agents, particularly those involved with microcap securities and private offerings.

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Today, the Securities and Exchange Commission published its 2014 priorities for its National Examination Program (“NEP”).  These priorities cover a wide range of issues at financial institutions, including investment advisers and investment companies, broker-dealers, clearing agencies, exchanges and other self-regulatory organizations, hedge funds, private equity funds, and transfer agents.  Similar to the 2013 priorities, the 2014 priorities were published to focus on areas that are perceived by the SEC staff to have heightened risk.

The examination priorities address market-wide issues and those specific to each of the NEP’s four program areas — (i) investment advisers and investment companies(“IA-IC”), (ii) broker-dealers (“B-D”), (iii) exchanges and self-regulatory organizations (“SROs”, and collectively, “market oversight”), and (iv) clearing and transfer agents (“CA” and “TA”).  For investment advisers and investment companies, the SEC has specifically outlined its priorities as follows: 

  • Core Risks
    • Safety of Assets and Custody
    • Conflicts of Interest Inherent in Certain Investment Adviser Business Models
    • Marketing Performance 
  • New and Emerging Issues and Initiatives
    • Never-Before Examined Advisers
    • Wrap Fee Programs
    • Quantitative Trading Models
    • Presence Exams
    • Payments for Distribution in Guise
    • Fixed Income Investment Companies 
  • Policy Topics
    • Money Market Funds
    • “Alternative” Investment Companies
    • Securities Lending Arrangements

The market-wide priorities include fraud detection and prevention, corporate governance and enterprise risk management, technology controls, issues posed by the convergence of broker-dealer and investment adviser businesses and by new rules and regulations, and retirement investments and rollovers. 

The full SEC press release can be found HERE and a full text of the 2014 Examination Priorities can be found HERE