By David Mainzer
The Securities and Exchange Commission's (the "SEC") Office of Compliance Inspections and Examinations (the "OCIE") conducts the SEC's National Examination Program (the "NEP"). An important part of the NEP is to promote compliance with the federal securities laws by publishing information to securities market participants, including SEC registered investment advisers.
On January 9, 2014, the OCIE published the NEP's "Examination Priorities for 2014." This document describes areas where the OCIE believes that investors are at "heightened risk." Therefore SEC registered investment advisers should expect that they will be a feature of the SEC's investment adviser examinations in 2014.
For investment advisers, some of the usual suspects are again in focus:
1. Conflicts of interest. For example, undisclosed compensation, allocation of investment opportunities, and favoring of clients/ products with higher fee arrangements.
2. Risk disclosures. For example, the higher risk of illiquid and leveraged investments and the marketing of risky investments to unsophisticated investors.
3. Performance advertising. For example, the construction and description of investment composites, performance record keeping and compliance oversight.
4. Custody of assets. For example, knowing when you have "custody" and ensuring compliance with the SEC's custody rule.
The NEP includes several new areas of focus related to investment advisers, including:
1. Advisers that have been registered for more than three years but never examined by the SEC.
2. Private fund advisers registered within the past three years.
3. Wrap fee programs.
4. Quantitative trading models.
5. Payments for distribution.
6. Risk disclosures by fixed income funds.
An emerging area of interest for hedge funds, private equity funds and venture capital funds in 2014 is likely to be the new "general solicitation" provisions (i.e. Rule 506(c)). One of the requirements for funds making general solicitations is that they conduct due diligence on investors to verify that they are "accredited investors." This due diligence is also new area of focus for the NEP.
The NEP is a good resource for investment advisers and their compliance staff. This update is not a complete description, so you should read the complete Examination Priorities for 2014 at http://www.sec.gov/about/offices/ocie/national-examination-program-priorities-2014.pdf.
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