Client Alerts

SEC Announces 2017 Examination Priorities

Client Alerts | February 1, 2017 | Hedge Funds

On January 12th, the Office of Compliance Inspections and Examinations (“OCIE“) of the Securities and Exchange Commission (the “SEC“) announced its 2017 examination priorities for registered investment advisers.[1] OCIE grouped the priorities into three general thematic areas: protecting retail investors, focusing on senior investors and retirement investments, and assessing market-wide risks. 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 managers that are SEC-registered investment advisers.

In the context of assessing risks to retail investors, OCIE identified certain initiatives that are relevant for private fund managers. For example, OCIE indicated that it will be expanding its Never-Before Examined Adviser initiative[2] to include focused, risk-based examinations of newly registered advisers as well as of selected advisers that have been registered for a longer period but have never been examined by OCIE. OCIE will continue to focus on advisers that provide advisory services from multiple locations[3] and advisers that employ individuals with track records of misconduct.[4] OCIE examination priorities will also include initiatives to review firms’ compliance practices for overseeing algorithms that generate recommendations.

As part of its focus on retirement investments, OCIE will examine investment advisers to pension plans of states, municipalities and other government entities to assess how they are managing conflicts of interest and fulfilling their fiduciary duty. OCIE will also review other risks specific to these advisers, including pay-to-play and undisclosed gifts and entertainment practices.

OCIE will also continue examining for structural risks and trends in the markets. OCIE’s specific examination priorities include continuing its initiative to examine for cybersecurity compliance procedures and controls, including testing the implementation of those procedures and controls.

In addition, OCIE plans to allocate resources to examining private fund advisers, and is also focusing on conflicts of interest and disclosure of conflicts as well as actions that appear to benefit the adviser at the expense of investors.

Though this description of OCIE priorities is not exhaustive, private fund managers that are registered investment advisers should take note of these stated priorities and review their businesses and operations to determine if any enhancements or changes are necessary.

[1] Examination Priorities for 2017, available here.
[2] See OCIE’s Letter to Never-Before Examined Investment Advisers, February 20, 2014, available here.
[3] See OCIE Risk Alert, “Multi-Branch Adviser Initiative,” Dec. 12, 2016, available here.
[4] See OCIE Risk Alert, “Examinations of Supervision Practices at Registered Investment Advisers,” Sept. 12, 2016, available here.