SEC announces examination Priorities for 2015
On January 13, 2015, the Office of Compliance Inspections and Examinations of the Securities and Exchange Commission (the “SEC”) announced its 2015 examination priorities. The 2015 examination priorities can be found here.
Private fund advisers should note the following examination priorities for 2015:
- Large Firm Monitoring – The SEC will continue to monitor large U.S. broker-dealers and asset managers to assess individual firm risks in the context of market-wide risk management and become aware of industry developments.
- Cybersecurity – The SEC will continue its 2014 initiative to examine investment advisers’ cybersecurity compliance and controls. The initiative can be found here.
- Equity Order Routing Conflicts – The SEC will assess whether firms are prioritizing trading venues based on payments or credits for order flow in conflict with their best execution duties.
- Recidivism – The SEC will continue to use its data analytics to identify individuals with track records of misconduct and examine firms that employ them.
- Proxy Voting – The SEC will examine investment advisers’ compliance with their fiduciary duty in voting proxies on behalf of investors. This area was highlighted in 2014 when the SEC released enhanced guidance on investment advisers’ proxy voting responsibilities. The guidance can be found here.
- Private Equity Fees and Expenses – The SEC will continue to conduct examinations regarding private equity fund fees and expenses. The SEC noted a high rate of deficiencies pertaining to this area. Note that this area was highlighted in a May 2014 speech by Andrew Bowden, a Director in the SEC’s Office of Compliance Inspections and Examinations, which can be found here.
The announcement follows a recent speech by SEC Chair Mary Jo White, in which she discussed a number of the SEC’s upcoming priorities. The speech can be found here. During the speech, Chair White noted the following SEC priorities that may impact private fund advisers:
- Enhancing Data Reporting – Chair White raised her view that current fund and adviser reporting obligations have not adequately kept pace with emerging products and strategies being used in the asset management industry. In this regard, she noted that the SEC is developing recommendations to modernize such reporting, including enhanced reporting on: (i) fund investments in derivatives, (ii) liquidity and valuation of fund holdings, (iii) securities lending practices, and (iv) separately managed accounts.
- Transition Planning – Chair White indicated that risks that arise when an investment adviser is no longer able to serve its clients (e.g., during a dissolution or departure of key personnel) are different than those associated with other kinds of financial firms, noting liquidity limitations imposed by illiquid assets or market conditions. In this regard, she noted that SEC staff are developing recommendations to require investment advisers to create transition plans to prepare for a major disruption in their business.
- Stress Testing – Chair White also noted that the SEC is considering ways to implement new requirements for annual stress testing by large investment advisers and large funds, in order to help market participants and the SEC better understand the potential impact of stress events.
Private fund advisers that also manage registered investment companies should note that the SEC has expressed a heightened interest in registered investment companies. In particular:
- Examinations of Registered Investment Companies – In its 2015 examination priorities, the SEC noted that it plans to conduct risk-based examinations of never-before-examined registered investment companies. It also indicated that it will continue to assess registered investment companies that offer alternative investments and use alternative investment strategies, with a particular focus on: (i) leverage, liquidity and valuation policies and procedures, (ii) factors relevant to the adequacy of such funds’ internal controls (e.g., staffing, funding and empowerment of boards, compliance personnel and back offices), and (iii) the manner in which such funds are marketed to investors.
- Risk Management Programs – During Chair White’s December speech, she indicated that the SEC is considering whether broad risk management programs should be required for mutual funds and ETFs to address risks related to liquidity and derivatives use. In addition, she noted that the SEC is reviewing options for specific requirements, such as updated liquidity standards, disclosures of liquidity risks or measures to appropriately limit the leverage created by a fund’s use of derivatives.