regulatory roundup: 2014 examination priorities presented by: erika subieta, j.d. 561.330.7645 -...
TRANSCRIPT
Regulatory Roundup:2014 Examination Priorities
Presented by:
Erika Subieta, J.D.561.330.7645 - extension 216
National Compliance Services, Inc.Delray Beach, FLwww.ncsonline.com
©2014 National Compliance Services, Inc.
Discussion topics
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The Industry
Enforcement Facts
SEC Initiatives and Priorities for 2014
Market-Wide Initiatives RIAs: The Never-Before Examined Initiative
Emerging Areas of Regulatory Interest
The States – Enhanced Advisor Examinations
Top Exam Deficiencies
The Industry The RIA industry in the past 10 years has grown by 8% with
breakaway brokers accounting for much of the increase.
Over the past 5 years the number of broker dealers dropped by almost 15%.
The number of registered reps dropped by almost 35,000 individuals.
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Enforcement Facts The SEC filed 686 enforcement action
cases in 2013. The 686 enforcement actions resulted in over 3.4 billion dollars in fines.
The SEC has a strong pipeline with over 900 investigations going forward into 2014.
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SEC’s Initiatives and Priorities
Most Significant Market-Wide PrioritiesFraud Detection and PreventionCorporate Governance, Enterprise Risk ManagementConflicts of InterestTechnologyDual RegistrantsNew Laws and RegulationsRetirement Vehicles and Rollovers
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SEC’s Initiatives and Priorities The Never-Before Examined Initiative *
The Securities and Exchange Commission announced on Feb. 20th, that its Office of Compliance Inspections and Examinations (OCIE) is launching an initiative directed at investment advisers that have never been examined, focusing on those that have been registered with the SEC for three or more years. OCIE previously announced that examining these advisers is a priority in 2014.
*Excluded from this initiative, are newly registered advisers to private funds, which are being examined pursuant to the “Presence Exam” initiative launched in October 2012.
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The Never-Before Examined Initiative
The NBE Initiative includes two distinct approaches:Risk AssessmentFocused Reviews
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Focus Areas for Review:Compliance ProgramFilings/DisclosureMarketing and Performance AdvertisingPortfolio ManagementSafety of Client Assets
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The Never-Before Examined Initiative
Emerging Areas of Regulatory Interest
Other Exam Priorities and Emerging Issues: Alternative InvestmentsSocial MediaWrap Fee ProgramsQuantitative Trading Models
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Emerging Areas of Regulatory Interest
Alternative Investments When recommending or placing client assets in Alternative
Investments, it is important to perform sufficient initial and ongoing due diligence on AI managers and AI products in order to better understand and evaluate risks relating to the underlying investments, operations, liquidity, as well as legal implications and risks.
Due diligence practices should be effective in assisting the adviser in determining whether the investment(s): Are consistent and suitable with the clients’ investment objectives. Are consistent with the investment principles and strategies that were
disclosed by the manager (as set forth in various documents, such as advisory disclosure documents, private offering memoranda, prospectuses, term sheets or other offering materials provided by the manager).
Utilize proper controls and provide enough transparency to ensure safety of client assets.
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Emerging Areas of Regulatory Interest
Alternative Investments On January 28th the SEC issued a risk alert that describes certain
industry trends, observations and deficiencies in the due diligence practices of investment advisers. Some of the noted deficiencies included: Annual Reviews - Omitting alternative investment due diligence policies
and procedures from their annual reviews, when selecting or recommending AI investments was a key portion of their business.
Marketing Claims - Providing potentially misleading information in marketing materials about the scope and depth of due diligence conducted.
Disclosures - Having due diligence practices that differed from those described in the advisers’ disclosures to clients.
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Emerging Areas of Regulatory Interest
Investment Adviser Use of Social MediaFirm’s use of social media must comply with various provisions of the federal securities laws, including, but not limited to, the antifraud provisions, compliance provisions, and recordkeeping provisions.In a recent Risk Alert, OCIE commented that RIAs’ use of social media has been a matter of interest to the SEC.
They made several observations and comments in the risk alert regarding recently examined firms that utilize social media and how that practice was addressed in policies and procedures.
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Emerging Areas of Regulatory Interest
Investment Adviser Use of Social MediaBelow is a non-exhaustive list of factors that RIAs may want to consider when evaluating the effectiveness of its compliance program with respect to firm, IAR, or solicitor use of social media:
•Usage Guidelines•Content Standards•Monitoring•Frequency of Monitoring•Approval of Content•Firm Resources•Criteria for Approving Participation•Training•Certification•Functionality
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Emerging Areas of Regulatory Interest
Investment Adviser Use of Social MediaFactors (continued):
•Personal/Professional Sites•Information Security•Enterprise Wide Sites
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The States – Enhanced Exams
The State’s have also expanded their exam activities.
Within the first 6 months of 2013, 1,130 examinations uncovered over 6,000 deficiencies in 20 compliance areas. Almost double the amount of deficiencies a year before.
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The States Best Practices at a minimum should include: Review Disclosure on Form ADV Part 1 vs Part 2 at least annually Disclose any conflicts of interest Intentional or unintentional custody of client assets Disclose any soft dollar arrangements Review and update client contracts Prepare and distribute a privacy policy initially and annually Review all advertisements including website for accuracy Calculate and document fees correctly Review WSPs at least annually and update as necessary Review registration requirement for the firm, IARs or solicitors
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Top Ten Exam Deficiencies Failure to keep accurate books and records – 68% Improper registration – 58% Contracts - 44% Privacy – 19% Brochure delivery – 18% Advertising – 18% Fees – 18% Supervision – 16% Custody – 16% Financials 13%
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Presented by:
Erika Subieta, J.D.561.330.7645 - extension 216
National Compliance Services, Inc.Delray Beach, FL
www.ncsonline.com
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