by Geoff Hecht, CIPM
A few months ago, I had the privilege of listening to Timothy Simons, CFA, CPA, CFP, CSCP, CIPM, Senior Managing Member of Focus1 Associates, give a presentation on Compliance Readiness & 2015 SEC Examination Priorities. The SEC is still struggling to efficiently examine a meaningful amount of investment advisers on an annual basis. Approximately 9% of investment advisers are examined each year and an estimated 20% of all investment advisers registered for more than 3 years have never been examined. The number of SEC registered investment advisers and overall assets under management have continued to grow through year end 2014 up into the beginning of 2015. At the same time, the number of SEC enforcement actions were up approximately 10% from year end 2013 to year end 2014. This increase can be partly credited to the SEC’s aggressive enforcement effort based on the “Broken Windows Theory” which goes off the premise that major violations can be averted by not tolerating minor ones.
When the SEC conducts a routine examination, there are some basic objectives regulators are trying to accomplish. Namely, whether the firm 1) has designed and implemented policies and procedures that are reasonably designed to prevent violations of the federal securities laws; 2) manages its business in accordance with disclosures made to prospective clients, clients and investors; and 3) adequately protects client assets.
The 2015 examination priorities are a mix of old and new focus areas. Some areas, like suitability, sales practices, large firm monitoring, recidivist representatives, excessive trading and anti-money laundering have been a focus for over 10 years. Others, like fixed income and alternative investment companies, cybersecurity, microcap fraud and never-before examined investment companies have only become more scrutinized over the last year or two.
Prior to ever having an examination, there are certain things a firm should do in order to be prepared in advance of the SEC showing up at your office. The firm should be familiar with the SEC’s request list, process, and expectations and comfortable with the location of information and supporting documents. It is also important that the firm designate a contact person who will act as a liaison between the SEC and the rest of the firm, as well as identify individuals who will be responsible for each item noted on the standard request list. Other considerations while you prepare include creating an agenda for the entrance interview, review deficiency letters from any prior SEC exams as well as the firm response to ensure you are doing what you said you would, and undergo either an internal or external Mock SEC Exam.
Taking the steps noted above will have you better prepared for the on-site exam.