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From Securities Regulation Daily, January 31, 2014

SEC officials review examination priorities at compliance and outreach program

By Jacquelyn Lumb

Staff from the SEC’s Office of Compliance Inspections and Examinations and the Divisions of Investment Management and Enforcement discussed their priorities at the recent compliance and outreach program for investment adviser and investment company senior officers. Jane Jarcho, the national associate director for the SEC’s National Exam Program, described some of the risk analytic initiatives that help OCIE identify misconduct through disparities. Among the areas the staff is focusing on are valuations of illiquid securities, investment strategies that are contrary to those disclosed to investors and governance and fees.

On the private fund side, including hedge funds, Jarcho said the staff is looking at soft dollars, principal transactions, misallocations of expenses and valuations. If the staff encounters a lack of cooperation during an examination, Jarcho said it will consider a referral to the Enforcement Division.

Investment Management priorities. David Grim, a deputy director in the Division of Investment Management, said the division’s priorities include portfolio reporting and exchange-traded funds, which represent a big growth area. The staff would like to have a rule providing exemptive relief for certain ETFs to reduce the amount of time and staff resources expended in this area. A proposal was developed in 2008, but the financial crisis caused it to be set aside. Grim said he hopes the initiative will resume in 2014.

Target date funds are also back on the division’s list of priorities, according to Grim. He hopes that initiative will also be picked up this year.

Grim reported that an area in which advisers should be vigilant is in the use of service providers. If an adviser brings in a subadviser that is not familiar with the regulatory regime, the adviser must be very diligent in ensuring that the subadviser knows the rules to which it is subject.

National Exam Program priorities. Jarcho said the National Exam Program’s priorities are established in discussions with many different groups at the SEC over a four to six month period. There are so many areas they would like to cover, she said. One area examiners will focus on this year is wrap fee programs. The staff will review policies and procedures regarding suitability, potential conflicts of interest and transaction fees.

Jarcho said that many believe the examinations are conducted with enforcement in mind. However, much of it is for information collection to help inform policy, she advised.

Grim talked about the JOBS Act provisions, some of which have brought heightened concerns about a potential increase in fraud. The SEC has proposed additional investor protection measures, but he noted that the commissioners have differing perspectives about the proposal, many of which have also been reflected in the comment letters. The staff is working on the next step, which is a big priority, he said. Chair Mary Jo White has also made clear that she wants the right people to be focused on what is going on in this market to help inform policy.

Another important priority is the harmonization of the rules for investment advisers and broker-dealers. Grim said there are significant costs and benefits connected to any potential rulemaking. Some view harmonization as a top investor protection issue, he added.

The National Exam Program staff is preparing a two-year project to review never-before examined registrants. One approach would be to conduct a risk assessment exam. The staff would request documents, including copies of firms’ policies and procedures and trading information, and would interview select officials. The firms would then be given a risk rating to determine their exam priority.

Another approach would be similar to the presence exams in which the staff would focus on five or six areas. The staff’s goal is to touch a large number of the firms that have registered in the past three years.

During a panel on private fund adviser topics, Ashish Ward, an exam manager for the Los Angeles regional office, noted that the presence exams they are conducting are very limited in focus to just one or two risk areas. The exams take about 90 days, which is half as long as a typical exam. Ward said the key focus areas are investment conflicts and inadequate disclosure about the conflicts; marketing, which is the number one deficiency at hedge fund advisers; valuations; and custody arrangements.

MainStory: TopStory InvestmentAdvisers InvestmentCompanies BrokerDealers JOBSAct RiskManagement

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