SEC Intends to Examine 25% of Investment Advisers That Had To Register, Per Dodd-Frank Act, by End of 2014

According to SEC Office of Compliance Inspections and Examinations Director Carlo di Florio, by December 31, 2014, the Commission plans to have examined 25% of the investment advisers that had to register with it after the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 issued its mandate. This will be done via “presence exams” at these investment firms.

The exams will concentrate on the issues of marketing, valuation, conflicts of interest, portfolio management, and asset verification. Also, the agency’s enforcement division will focus on private fiduciary duties.

According to di Florio, based on “preliminary observations” from initial presence exams it appears that even though a lot of longtime private investment firms have done a good job in constructing compliance risk management and control programs that work, OCIE examiners still noticed that there were numerous issues when they conducted initial exams, such as deficiencies related to conflicts of interest mismanagement. One example of this is the inflation of certain fees to conceal losses. Also, examiners found that some expenses, such as property rent and salaries, were inappropriately charged to funds instead of to the fund manager.

According to BNA, sources report that these on-site presence exams started in October, right after Deputy OCIE Director Drew Bowden sent a letter to the newly registered investment advisers letting them know these would take place. The in-person exams are supplemented with approximately 30 questions that are sent to the advisers.

SEC Division of Enforcement Asset Management Unit Chief Bruce Karpati, who spoke along with diFlorio at the Regulatory Compliance Association conference, noted that some of the recent private fund exams have uncovered compliance programs that were “ineffective or inadequate.” He believes that some of these registrants were not totally ready to undergo a federal agency examination.

Karpati also spoke about incidents involving not enough cooperation with exam staff. Such occurrences will only more quickly turn the matter into an enforcement matter, he said.

The creation of five SEC enforcement units focusing on specific issues has resulted in a staff that includes former hedge fund managers and private sector employees. These specialists take part in investigations, assist in staff training, and take part in Commission policy decisions.

Of the over 4,000 private fund advisers that are SEC-registered, over 1,500 of them joined as a result of the Dodd-Frank requirement. Under the Act’s Title IV, the majority of private adviser exemptions from the Investment Advisers Act of 1940 were taken away.

If you believe that you were the victim of investment adviser fraud, do not hesitate to contact our securities fraud lawyers today. Shepherd Smith Edwards and Kantas, LTD, LLP has helped thousands of investors recoup their losses.

SEC Targets Registrants in Exam Program; Specialists Aid Agency Broadly, Officials Say, Bloomberg/BNA, December 19, 2012

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Investment Advisor Securities Roundup: Two Firms Settle SEC Claims That They Impeded with Examinations, FINRA Defends SRO Model, IA Allegedly Duped Private Equity Investors, & CDO Misrepresentation Accusations Against GSCP Executive Are Dismissed, Stockbroker Fraud Blog, December 10, 2012

FINRA Provides Guidance As It Opens Up Arbitration Process to Investment Advisers, Stockbroker Fraud Blog, December 10, 2012

SEC’s Investment Management Division Considers Applying 1940 Advisers Act to Private Fund Advisors, Institutional Investor Securities Blog, December 19, 2012