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SEC Unveils Details of New Advisor Exams

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Moving ahead on priorities announced in January, the SEC revealed details regarding its plans to examine advisors who have not been examined before.

Specifics of the SEC's Office of Compliance Inspections and Examinations (OCIE) program, called the "Never-Before Examined Initiative" and aimed at targeting unexamined advisors that have been registered with the SEC for three or more years, come just over a month after the agency announced that this issue would be an examination priority in 2014.

The SEC says OCIE staff will conduct examinations of a "significant percentage" of advisors that have not been examined since they registered with the SEC.

According to the SEC's announcement Thursday, the initiative will include two approaches: risk-assessment and focused reviews. The risk-assessment approach includes a high-level examination of an advisor’s overall business activities with a particular focus on their compliance program, according to the SEC. The focused review will look at higher-risk areas of the advisors' business operations including filings and disclosure, marketing, portfolio management as well as safekeeping of client assets. 

“Our examinations will focus on areas most important to protecting investors,” Jane Jarcho, national associate director of OCIE’s Investment Adviser/Investment Company examination program, said in a statement. “We will also promote compliance by engaging with these advisers through outreach efforts.”

In a sample letter to a firm up for examination, the SEC outlined the specific high-risk areas a “focused review” will look target:

Compliance Program. Registered investment advisers are required to adopt and implement written policies and procedures that are reasonably designed to prevent violations of the Advisers Act. NEP staff will evaluate the effectiveness of the compliance program. This evaluation will include a review of advisory books and records to determine if an adviser has adequately identified conflicts of interest and compliance-related risks, adopted appropriate policies and procedures to mitigate and manage those conflicts and risks, and empowered a competent Chief Compliance Officer (“CCO”) to administer the compliance program.

Filings/Disclosure. Investment advisers must disclose all material facts regarding conflicts or potential conflicts of interest so that clients can make an informed decision regarding entering into or continuing an advisory relationship. Such disclosures should include information on the full scope of the adviser’s business, investment activities, and conflicts of interest. NEP staff will analyze an adviser’s filings and disclosure documents to assess the content and scope of disclosures that have been made.

Marketing. Investment advisers may utilize marketing materials to solicit new clients or retain existing clients. NEP staff will review marketing materials and evaluate whether an investment adviser has: made false or misleading statements about its business or performance record; made any untrue statement of a material fact; omitted material facts; made any statement that is otherwise misleading; or engaged in any manipulative, fraudulent, or deceptive activities.

Portfolio Management. An investment adviser has an obligation to act in the best interests of its advisory clients and to identify, mitigate, and disclose any material conflict of interest. NEP staff will review and evaluate an investment adviser’s portfolio decision-making practices, including the allocation of investment opportunities and whether the adviser’s practices are consistent with disclosures provided to clients.

Safety of Client Assets. Registered investment advisers that have “custody” of client assets must take specific measures to protect client assets from loss or theft. NEP staff will review an adviser’s compliance with the relevant provisions of the Advisers Act and other applicable law that are designed to prevent the loss or theft of client assets.

If problem areas are found during the examination, OCIE staff "may refer the deficiencies to the Commission’s Division of Enforcement, state regulatory agency, or other regulator for possible action,” the SEC warned.

The agency also announced Thursday that starting later this year, the OCIE will invite unexamined SEC-registered investment advisors to attend regional meetings where they can learn more about the examination process.

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