Investments Advisers Told to Look at Recent SEC Enforcement Actions When Preparing for Exams

Securities and Exchange Commission’s Office of Compliance Inspections and Examinations deputy director Norm Champ says that when preparing to be examined, investment advisers should look at recent SEC enforcement actions stemming from problems found during previous exams at other advisers. Champ made this suggestion last month at an American Law Institute-American Bar Association-organized investment adviser conference in New York. Champ says that his views were his own and that he wasn’t speaking for the SEC.

Two cases that he cited as ideal examples were SEC v. Venetis and In re AXA Rosenberg Group LLC. Champ said that three AXA Rosenberg entities ended up paying over $240 million over SEC administrative proceedings because of a key computing error in the Venetis case, which involved a multi-million dollar fraud scam over the sale of bogus promissory notes. Although senior management discovered the mistake, they decided not to tell the SEC. The commission suspected there was a problem when its examiners were prohibited from entering certain rooms.

Champ is suggesting that before an exam, investment advisers should figure out their risk areas and review compliance and control procedures. He says that the SEC chooses which advisers to examine based on complaints, tips, referrals, prior exam history, third party data (including information from regulators), commission filing data, affiliated business activity, firm size, disciplinary history, pay arrangements, and time between exams. Exam teams study the investment adviser’s control environment, engage with senior management, pay attention to interactions within the financial firm, and look at conflicts of interest, valuations, portfolio management, advertising, trade allocations, and custody of assets.

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Related Web Resources:
Securities and Exchange Commission

Office of Compliance Inspections and Examinations

More Blog Posts:
AXA Rosenberg Entities Settle Securities Fraud Charges Over Computer Error Concealment for Over $240M, Stockbroker Fraud Blog, February 10, 2011 FINRA Will Customize Oversight to Investment Adviser Industry if Chosen as Its SRO, Stockbroker Fraud Blog, April 8, 2011
Custodial Firms Get Tougher About Registered Investment Adviser Compliance, Institutional Investor Securities Blog, December 28, 2010
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