SEC Exams of Investment Advisers - Top 10 List [Posted by by howard@compliance-insights.com]
Everyone loves a Top 10 List, and OCIE Director Lori Richards (SEC's Office of Compliance Inspections and Examinations) did not disappoint. C-I outlines OCIE's current "Top 10 Areas of Focus" and provides a link to the details.
..... 1. Controls Over Valuation. A firm's controls for valuing or pricing securities, with particular emphasis on structured products, illiquid securities or other difficult-to-price securities.
..... 2. Controls Over Non-Public Information / Personal Trading / Code of Ethics. Instances of suspicious trading have increased, so the SEC was to review a firm's controls to prevent insider trading in client, prop or employee accounts. They'll look at the firm's own compliance and supervisory programs.
..... 3. Dealing with Senior Citizens. Examiners are looking at free lunches, marketing, sales and related supervisory processes. Need we say more - it's nothing you haven't heard before.
..... 4. Compliance and Supervision. A key area; examiners want to understand the IA's compliance program to see if it appears designed to capture and manage that particular adviser's compliance risks. Has the adviser conducted a risk-assessment and ID'd its own compliance risks and conflicts of interest, then crafted and implemented procedures to effectively mitigate those risks. Recent conflicts: new revenue-sharing payment streams from IAs to BDs, so as to get on "recommended adviser lists.
..... 5. Portfolio Management. Examiners want to see if securities recommendations and investments made for clients and funds are consistent with the adviser's disclosures and the client's investment objectives and restrictions.
..... 6. Brokerage Arrangements and Best Execution. Brokerage arrangements must be consistent with fiduciary obligations to clients, and that IAs seek best execution, whether it uses soft dollars consistent with its disclosures, and whether the adviser periodically and systematically evaluates the costs and benefits of its brokerage arrangements.
..... 7. Allocations of Trades. Has the adviser disclosed its policies with respect to how it will allocate trades? Examiners look out for "cherry picking" and favoritism in allocations.
..... 8. Performance Advertising, Marketing and Fund Distribution Activities. Claims about past investment performance, ... must contain accurate information, and required disclosures (like conflicts of interest) are included in materials, pitchbooks, etc.
..... 9. Safety of Clients and Funds' Assets. Safeguarding clients' assets from theft. loss and misuse - including custodian arrangements and whether an independent custodian sends account statements directly to clients.
..... 10. Information Processing and Protection. A firm's controls over books and records, disclosures and filings; including business continuity plans.
Link: Speech by SEC Staff, 2/20
http://www.sec.gov/news/speech/2008/spch032008lar.htm?nl042408BLOG2
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