SEC Announces 2016 Examination Priorities

On January 11, 2016, the Office of Compliance Inspections and Examinations (“OCIE”) of the Securities and Exchange Commission (the “SEC”) announced its 2016 examination priorities for registered entities.[1] OCIE grouped the priorities into the same three general thematic areas as in 2015: protecting retail investors, assessing market-wide risks and using data analytics to identify potential wrongdoing. OCIE notes that the list of priorities is not exhaustive and priorities may be adjusted in light of market conditions, industry developments and ongoing risk assessment.

This Legal Update focuses on identified priorities particularly relevant to private fund advisers.

Retail Investors. OCIE will continue to focus on assessing risks to retail investors for the foreseeable future by examining specific trends. This includes a continuation of OCIE’s multi-year examination initiative launched in June 2015, which focuses on SEC-registered investment advisers and broker-dealers and the services they offer to investors with retirement accounts.[2] In addition, OCIE will examine advisers whose clients include public pensions, with a particular focus on pay-to-play[3] and the identification of undisclosed gifts and entertainment.

Market-Wide Risks. OCIE will continue examining for structural risks and trends in the markets. Specific examination priorities for 2016 include:

• Cybersecurity compliance and controls. OCIE notes that its focus on cybersecurity will advance its 2015 initiative of examining the cybersecurity compliance and controls of broker-dealers and investment advisers, and will include testing and assessing the implementation of cybersecurity procedures and controls.[4]
• Liquidity controls in private funds that have exposure to potentially illiquid securities.

Data Analytics. OCIE also will continue to use enhancements in data analytics to focus on firms that have elevated risk profiles or appear to be potentially engaged in illegal activity. Among the examination priorities in this area are:

• Focusing on individuals with a track record of misconduct and the firms that employ such individuals.
• Product promotion of new, complex and high risk products and related sales practices, to identify potential suitability issues and breaches of fiduciary obligations.

Other Initiatives. In addition, OCIE plans to allocate examination resources to other areas relevant to private fund advisers, such as:

• Maintaining a focus on fees and expenses charged by private funds, including evaluating the controls and disclosure associated with side-by-side management of performance-based and purely asset-based fee accounts.
• Continuing to conduct focused, risk-based examinations of never-before-examined investment advisers and never-before-examined investment companies.[5]
• Examining private placements (including offerings involving Regulation D of the Securities Act of 1933) to evaluate whether legal requirements are being met in the areas of due diligence, disclosure and suitability.

Private fund managers should take note of these stated priorities and review their businesses and operations to determine if any enhancements or changes are necessary.
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[1] Examination Priorities for 2016, available here.
[2] Retirement-Targeted Industry Reviews and Examinations Initiative, available here.
[3] In addition to the SEC’s pay-to-play rule, many states and municipalities have enacted statutes and regulations that impact how investment advisers may solicit investment advisory business from state agencies and municipalities that administer public pension plans.
[4] OCIE Cybersecurity Initiative, available here. SEC IM Guidance Update regarding Cybersecurity Guidance, available here.
[5] OCIE’s Letter to Never-Before Examined Investment Advisers, available here.