Are You Ready for Your Close Up? SEC Targeting Unexamined Investment Advisers

The Securities and Exchange Commission (SEC) typically examines just eight percent of the 11,000 registered investment advisers it oversees. As a result, many advisers have been able to operate under the radar.

That may soon change. The SEC recently announced an initiative to examine registered investment advisers who have never been subjected to review, with an emphasis on those that have been registered three years or more. Advisers to private funds are excluded from the effort, as they are already being examined pursuant to the “Presence Exam” initiative launched in October 2012.

The SEC estimates that 4,400 advisers have never been examined. Of those, the agency will target those that have been registered for more than three years and are domiciled in the U.S., which amounts to an estimated 2,180 advisers.

So, if you haven’t been examined, it’s time to get ready.

According to the SEC, “the Never-Before Examined Initiative includes two distinct approaches: risk-assessment and focused reviews. The risk-assessment approach is designed to obtain a better understanding of a registrant. This type of exam may include a high-level review of an adviser’s overall business activities, with a particular focus on the compliance program and other essential documents needed to assess the representations made on disclosure documents. The focused review approach includes conducting comprehensive, risk-based examinations of one or more of the following higher-risk areas of the business and operations of advisers selected for an examination.”

The areas that the SEC indicated will be its top priorities during examinations are: advisers’ compliance programs, filings and disclosure, marketing, portfolio management, and, safekeeping of client assets. The SEC  has earmarked these areas as top priorities for the past several years.

While no business wants to undergo any type of government audit, there are steps you can take to make an SEC examination proceed more smoothly. Below are a few tips:

• Conduct your own audit: As the saying goes, an ounce of prevention is worth a pound of cure. Therefore, it is imperative to conduct your own thorough review of your firm’s compliance activities, including the known areas of concern noted above.
• Train staff about exams: Most SEC examiners are not attorneys or accountants, although they may have extensive experience in the securities industry. Having SEC examiners in your conference room can be unsettling to staff. It is important to educate them about how to interact with examiners, while encouraging candor and cooperation.
• Get organized: An SEC examination will become more stressful and interruptive if you are left scrambling for requested documents or information. Therefore, making sure you have all the proper documentation can help alleviate these issues down the road.

If you have any questions about the SEC’s latest initiative or would like to discuss your company’s compliance activities, please contact me, Dan Brecher, or the Scarinci Hollenbeck attorney with whom you work.