SEC Examination and Enforcement Priorities

These are my notes from the NRS Fall Compliance Conference.

John Walsh, Sutherland
Karol Pollock, SEC Deputy Associate Regional Director (Exams)

Karol outlined the examination process.

1. You get a phone call. But prior to the phone call, the examiners will have done some background research, looking at the firms ADV, public website and an internet search.

2. You get a document request. The examiners will try to tailor it to the particular firm. A quick response is a good sign. A delay in getting materials is a red flag.

3. After the exam you will get a summary letter. This used to be called the deficiency letter. The SEC may go back to calling it a deficiency letter.

4. Post exam the examiners will work with the Division of Investment Management. The goal is to get a bigger enforcement footprint.

OCIE has expanded its mission. It is not a branch of enforcement. It acts as the eyes and ears of the Commission. It’s the first to see new trends. It also comments on rulemakings.

Here is a preview of the 2015 exam priorities. These are not final yet, but are likely to end up in this year’s disclosure.

Perennial priorities

• Safety of client assets and custody
• Conflicts inherent in IA firms
• Marketing and performance disclosure

Initiatives

• Never before examined
• Fixed income investment companies. The SEC is looking ahead to rising interest rates. The SEC wants to make sure these investment products are making proper disclosures about what may happen with rising rates.
• Private fund advisers. The exam staff finds them “interesting.” There is a clash with organizations that are not used to regulatory exams.
• Retirement vehicles and rollovers
• Dual registrants. Is each side aware of the different compliance requirements. BDs “gone wild” when they switch to IA and are no longer oppressed by the FINRA manual.

Potential New Initiatives

• ETFs – They increasing have a narrow niche and increasing complexity. The SEC wants to make sure that there are proper disclosures and sales suitability,
• Accuracy of ADV. The SEC is seeing adviser inflate assets to stay registered with the SEC and avoid the transfer to state regulation.
• False Addresses. The SEC is seeing adviser use a false Wyoming address to get SEC registration.
• Proxy adviser. Reviewing recommendations and voting for investors.

There was a discussion of the “may” versus “will” case. If you are actually doing something all the time, don’t say you may do it.