October 16, 2012

SEC Announces "Presence Exams" for New RIAs

In a recent letter sent to newly-registered RIAs, the U.S. Securities and Exchange Commission (SEC) has announced the roll out of its new National Exam Program ("NEP"). The NEP is a new two-year initiative to conduct "focused", "risk-based" examinations of newly registered advisory firms that manage private funds (e.g. hedge funds, private equity funds).

A copy of the SEC letter can be found here.

These examinations may cover any area of your firm's compliance obligations but will initially focus on the following topics that are deemed to be high risk:

  • Marketing
  • Portfolio Management
  • Conflicts of Interest
  • Safety of Client Assets
  • Valuation
The NEP initiative will be rolled out in three phases:
  1. Engagement Phase.  The NEP will inform registered firms about their obligations, provide outreach resources that are geared towards educating advisors of these responsibilities. 
  2. Examination Phase.  NEP staff will notify those firms that will be subject to examination and perform these examinations.
  3. Reporting Phase.  The NEP will report its observations to the SEC and the public.

What does this mean for your SEC-registered firm?

For newly-registered SEC advisors that manage a hedge fund, private equity fund or other private fund, now will be a good time to review your compliance policies and procedures as well as your Form ADV.  Be mindful that even if there have not been any significant changes within your firm since your initial registration, check your Form ADV for consistency with your business model and advisory services.  

Just because your ADV was sufficient to receive initial SEC approval, it does not necessarily mean that it adequately reflects of your business.  Examinations are the only way for regulators to confirm any potential errors of omission or commission (no pun intended!). 

How about state-registered advisors?

We have seen an unprecedented number of examinations being held within the first 6-12 months after regulatory approval.  While each state will take an independent approach to RIA examinations, we believe that the likelihood of examinations at the state level will be as high as it has ever been in the past.

Next Steps

All RIAs should:
  • Review their compliance policies and procedures to ensure that they adequately prevent, detect and correct any violations of federal and state securities laws.
  • Review their Form ADV 1, 2A and 2B's to confirm that each is consistent with their advisory business and their investment adviser representatives.


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