SEC’s National Examination Priorities for 2014

SEC’s National Examination Priorities for 2014

The Securities and Exchange Commission’s (“SEC”) Office of Compliance Inspections and Examinations (“OCIE”) announced the National Examination Program (“NEP”).  Below are the top 7 things to take away from it. Gear up and prepare yourselves – the SEC says they’re concerned with:

1) Newbie Advisers – Advisers who have been registered for more than 3 years but have never undergone examination are a priority. The SEC has occasionally mentioned this as a priority in the past, but inclusion in the NEP, and questioning from Congress about this very subject means an inspection is really likely to happen this year.

2) Dual Registrants – Individuals that are licensed as registered representatives and investment adviser representatives (“IAR”) and firms that are both broker-dealers and registered investment advisers (“RIAs”) may be in a position to steer clients into accounts or relationships that may primarily benefit the registrants and not necessarily the customers. This may be in contravention of their fiduciary duties under the Advisers Act of 1940.

3) Rollover of Retirement Investments – How licensed firms and individuals market and advertise to investors who have retirement assets at a former employer is a concern.   The SEC is looking for issues of unsuitability, churning or conflicts of interest.  Are investors being advised to roll over such assets into higher cost alternatives? Are benefits or credentials of registrants being misrepresented?  These are some of the questions the SEC will be asking.

4) Recently Enacted Requirements – Are firms and individuals correctly using the “general solicitation” and “general advertising” recently allowed under the revised Rule 506(c) of Regulation D and under the JOBS Act? Are licensed firms and individuals verifying accredited investor status or are they continuing to simply “check the box?”  Are firms doing their due diligence on issuers and offerings?

5) Accidental Custody – Registered Investment Advisers who have “custody” under SEC Rule 206(4)-2 of the Advisers Act are a priority.  Oftentimes, this could happen despite their not acting as custodians if: (i) the adviser access client information through the client’s electronic access codes, i.e., user, name and password; (ii) the adviser or someone affiliated therewith acts as a trustee for client accounts; and (iii) the adviser may by itself change beneficiaries of an account or addresses in a similar manner.

6) Performance Marketing – The SEC is focusing on back tested or hypothetical performance reporting. Likewise, the SEC is focusing on the use and disclosure of composite performance figures and performance recordkeeping supporting the same

7) Presence Exams – The SEC continues to examine RIAs who had to become registered as a result of Section 402 of the Dodd-Frank Act.  Advisers to private funds and hedge funds will be examined as to the following five categories: (i) conflict of interests; (ii) safety of client assets; (iii) marketing; (iv) portfolio management; and (v) valuation of assets.

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