Jan 16 The top U.S. securities regulator says
its examiners will finally get around to knocking on doors at
some of the thousands of investment advisers it has never met,
including some waiting for more than a decade for the agency to
While the U.S. Securities and Exchange is responsible for
overseeing most independent investment advisers, it doesn't
examine the vast majority of them often, and some, not at all.
The agency, which examines about 9 percent of roughly 11,000
investment advisers per year, has long argued that it does not
have enough examiners, or the budget, to keep up with the
The new focus - raised after years of criticism that some
advisers are slipping through the cracks - is not a guarantee
that the SEC will actually visit a neighborhood near you. But it
is certainly a wake-up call to prepare for whatever questions
examiners may throw, compliance professionals say.
The SEC's focus on "never-before examined advisers" is one
of the agency's 2014 examination priorities, according to a list
published by the SEC's Office of Compliance Inspections and
Examinations (OCIE) on January 9.
These advisers tend to counsel individual investors and are
not the same as the roughly 1,500 other advisers who counsel
hedge funds and private equity funds and are subject to a
different type of SEC exam program.
The agency is honing in on some 1,000 traditional investment
advisers who have been registered with the SEC for more than
three years, but who were never examined, according to Jane
Jarcho, who heads OCIE's exam program for investment advisers
and investment companies. There are roughly 11,000 investment
advisers registered with the SEC.
The SEC will tackle exams for advisers it never reviewed in
two ways: a broad look at some firms, to determine risks, such
as shoddy supervision, they may pose to the investing public. At
other firms, examiners will dive deeply into one or two areas,
such as marketing or managing conflicts of interest.
Firms at which the SEC uncovers problems typically have a
chance to make things right, such as reimbursing excess fees to
customers. But examiners often refer egregious violations to the
SEC's enforcement division, which can fine or suspend advisers.
Not all compliance professionals are convinced that the SEC
will have the resources it needs to plod through everyone on its
list. "In my mind, it's fifty-fifty whether they'll actually
pull it off," said Steven Thomas, director of Lexington
Compliance, a Sioux Falls, South Dakota-based consultancy for
A $1.1 trillion spending bill unveiled by U.S. lawmakers on
Tuesday suggests that Thomas may be right. It would allot the
U.S. Securities and Exchange Commission $1.35 billion for the
fiscal year ending September 30, 2014. An SEC spokesman said the
figure could limit the agency's ability to bolster its
enforcement and examinations programs.
Nonetheless, investment advisers should prepare, even if
they ultimately never hear from the agency, said Nancy Lininger,
head of The Consortium, a compliance consultancy in Camarillo,
California. The risk of not being prepared is too steep,
Lininger said, especially given a new focus on robust
enforcement by new SEC Chairwoman Mary Jo White.
Advisers can prep by directing their compliance officers to
do these five things now:
1. Organize the basics: There are some records that the SEC
typically wants to see, so don't put yourself in the position of
scrambling for them at the last minute, says Korrine Kohm, a
vice president with Ascendant Compliance Management in New York.
For example, employees should complete a questionnaire every
year about their compliance with the firm's policies and
procedures. That may include answering questions about whether
they've made political contributions, a violation that can
prevent advisers from doing business with government clients for
two years. Employee questionnaires are easy to catch up on if
firms are behind, Kohm says.
2. Review your firm's public disclosure document: Businesses
change, but many firms never update information about their
business that they file with the SEC in the mandatory disclosure
known as Form ADV, said Kohm. Big changes that advisers
sometimes neglect to report are a spike in their assets under
management or getting into an additional line of business, such
as managing a new private fund, Kohm says.
3. Test yourself: Study lists of information and documents
the SEC requested in examination letters it previously sent to
other firms, says Salvatore Faia, president of Vigilant
Compliance, LLC, a consultancy in Philadelphia. You can get them
from compliance consultants and organizations such as the
National Society of Compliance Professionals, who often keep
redacted copies of letters as resources for clients and members.
Then, try to gather the same information in a "mock process" at
your own firm, says Faia.
4. Update and tailor your compliance manual: Many investment
advisers, especially one or two person shops, buy pre-packaged
compliance manuals that outline polices for everything from
disclosures to archiving e-mails. But these manuals typically do
not align with a firm's specific business model, says Brian
Hamburger, president and chief executive of MarketCounsel, a
compliance consultancy in Englewood, New Jersey.
For example, a firm that pursues a new type of business,
such as advising an employer-sponsored retirement plan, should
update the manual to include policies for complying with
regulations in that practice area, Hamburger says.
5: Clear the compliance officer's plate: Chief compliance
officers often have too many other jobs, said The Consortium's
Lininger. For example, they many also be the firm's rainmaker
and chief technology officer. Playing catch-up at a firm that
has never been examined, especially this year, can be even more
overwhelming to a compliance officer who has two other jobs,
said Lininger. Make a business decision to shift the extraneous
work to others or hire more help.