Finding A Way.

Setting the Stage for 2014: SEC Announces Exam Priorities

Setting the Stage for 2014: SEC Announces Exam PrioritiesPay attention to this one.  Earlier this month, the SEC Office of Compliance Inspection and Examination issued its annual list of 2014 examination priorities for a variety of financial institutions including investment advisers/mutual funds, broker-dealers, exchanges and self-regulatory organizations and clearing/transfer agents.

This post focuses on investment advisers.  I would strongly recommend that you read this, the full SEC release and do your homework, especially if it has been a while since your last exam or if 2014 might become your first year ever.

The SEC identified six market-wide issues across the entire SEC national examination program:

  • Fraud detection and prevention;
  • Conflicts of interest and legal/ compliance/financial/operational risks (including an evaluation of the “tone at the top”);
  • Governance and supervision of IT systems, operational capability, market access, information security, and business continuity/disaster recovery programs;
  • Risks presented by businesses that are dually registered as broker-dealers and investment advisers;
  • New laws and regulations, principally Rule 506(c) and crowd-funding; and
  • Issues arising from retirement vehicles and rollover accounts.

For investment advisers, the SEC listed as priorities for the 11,000 investment advisers under its purview:

  • Safety of client assets and custody rule; to refresh your recollection, the SEC has issues its dissatisfaction with the state of the nation in a Risk Alert in 2013, which I strongly recommend you read as well;
  • Conflicts of interest inherent in some advisers’ business model.  Specific examples: compensation arrangements, allocation of investment opportunities, risk controls, especially for illiquid and leveraged products and higher risk products targeted to retail investors;
  • Marketing/performance, particularly hypothetical and back-tested performance advertising, performance record keeping and compliance oversight of marketing;
  • Wrap fee programs, particularly associated conflicts of interest, best execution and disclosures; and
  • Payments made by managers to distributors and intermediaries.

The list is not exhaustive.

On a separate note, now may also be a good time for your annual review, which I will cover in a separate post this month so stay tuned for it.   You are probably also already thinking about your Form ADV amendment that is due at the end of this quarter.

Get a head-start for smooth sailing. Call or e-mail me with questions or comments.  In the meantime, I wish you a great start for 2014, compliance and other-wise.

Eckerle Law offers legal advice in a variety of transactional and regulatory matters and serves companies’ plenary business law needs. Its founder, Bettina Eckerle, is a veteran of Debevoise & Plimpton and Wachtell, Lipton, Rosen & Katz.  She also served as the General Counsel of two companies en route to IPO. Please visit the Eckerle Law website for more details.