The SEC’s Office of Compliance Inspections and Examinations (“OCIE”) published the 2013 examination priorities for its National Examination Program (the “NEP”). The priorities are organized according to the NEP’s four distinct program areas: (i) investment advisers and investment companies, (ii) broker-dealers, (iii) clearing and transfer agents, and (iv) market oversight. This article focuses primarily on the examination priorities for investment advisers and investment companies.
Corporate Governance and Enterprise Risk Management. The NEP risk/examination priorities include a number of topics that apply to nearly all SEC registrants. Among these is an ongoing effort to meet with senior management and boards of entities registered with the SEC and their affiliates to discuss enterprise risk, and in particular, how financial, legal, compliance, operational, and reputational risks are managed. As described by the Staff, “[t]his initiative is designed to: (i) understand firms’ approach to enterprise risk management; (ii) evaluate firms’ tone at the top; and (iii) initiate a dialogue on key risks and regulatory requirements. This effort provides the NEP with an opportunity to assess overall risk management at certain registrants through discussions with independent board members, senior management, internal audit, key risk and control functions, and leaders of business lines.”
Investment Companies and Investment Advisers. The ongoing priorities for investment adviser and investment company (“IA-IC”) examinations in part echo those announced for OCIE’s presence examination program for new advisers: (1) custody/safety of client assets: (2) conflicts related to adviser compensation arrangements; (3) performance advertising; (4) conflicts of interest related to allocation of investment opportunities; and (5) fund governance and “tone at the top.” New and emerging issues for IA-IC examinations include (a) conflicts of interest that can arise for dually-registered investment adviser/broker-dealers and when separate broker-dealer and advisory organizations share common personnel; (b) the use of “alternative and hedge fund strategies” by mutual funds, ETFs and variable annuity products; and (c) payments made by advisers and funds to distributors and intermediaries, such as revenue sharing, sub-TA, and shareholder servicing fees. Other areas of IA-IC focus in the NEP are (i) “stress testing” by money market funds; (ii) compliance with exemptive orders, e.g., those permitting managed distribution plans by closed-end funds, employee securities companies, and coinvestment by advisers and their affiliates alongside funds; and (iii) compliance with the “pay-to-play” rule (Rule 206(4)-5 under the Investment Advisers Act of 1940, as amended).