SEC Launches National Exam Program for Newly-Registered Fund Advisers

October 14, 2012 Comments Off on SEC Launches National Exam Program for Newly-Registered Fund Advisers

The SEC’s Office of Compliance Inspections and Examinations (OCIE) recently announced creation of the National Exam Program (NEP), a two-year initiative to conduct risk-based examinations of advisers to private funds that recently registered with the SEC (i.e., registered after Dodd-Frank). The so-called “Presence Exams” initiative will take place over three phases: engagement, examination and reporting. 

Engagement.  This first phase represents the NEP’s outreach program to inform newly-registered firms of their obligations under the Advisers Act and related rules, resources available from the SEC including its Compliance Outreach Program.

Examination.  In this phase, the NEP will review certain areas of perceived higher risk of advisers selected for examination. The identified areas include:

Marketing: Review of marketing materials used to solicit or retain investors to evaluate whether the adviser has made false or misleading statements or omissions about its business or performance. Solicitation efforts and the use of placement agents will also be reviewed.

Portfolio Management: Review and evaluate portfolio decision-making practices, including allocation of investment opportunities and consistency with disclosures made to investors.

Conflicts of Interest:  Review procedures and controls to identify, mitigate and manage conflicts within firms. Identified areas of concern include allocation of investments, fees and expenses, outside business activities, personal securities trading, and related party transactions.

Safety of Client Assets:  Review compliance with custody rules and independent audits designed to prevent the loss or theft of client assets.

Valuation:  Review of valuation policies and procedures, including methodology for illiquid or hard to value instruments and calculation of performance and management fees.

Examinations under this phase may have the same consequences as any other OCIE examination–advisers may receive deficiency letters and direct corrective action; serious deficiencies may be referred to the SEC’s Enforcement Division.

Reporting.  At the conclusion of the Examination Phase, the NEP intends to report its observations to the SEC and the public. The NEP’s stated goal in doing so is to encourage firms to review compliance in the covered areas and improve advisers’ compliance programs.

Beyond these stated goals, advisers to private funds can expect that any significant findings or widespread compliance failures identified through the Presence Exams initiative will form the basis of future SEC rulemaking and will remain under heightened scrutiny under the OCIE’s regular examination program.

Advisers selected for examination under the Presence Exams initiative will receive separate notice from the NEP.



Jack G. Martel is the author of Investment Adviser Law Blog which is devoted to providing information and discussion of interest to investment advisers, private fund managers and others in the financial management industry. Jack is a partner in Ragghianti | Freitas LLP. He has over fifteen years experience in general business and securities transactions with a focus on assisting investment advisers, fund sponsors and managers in all manner of legal, regulatory and compliance issues. Jack can be reached at 415.453.9433.

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