If you’re a fund manager, you’ll want to be in the know on 2018 SEC Priorities for the National Exam Program (“NEP”), which continues to advance in terms of data usage to analyze regulatory filings and trading activity.
In FY 2017, the NEP completed over 2,870 examinations, an 18% increase over FY 2016.
For Registered Investment Advisers and Private Funds, there are a few areas which should be of concern. Below are excerpts from the 2018 SEC Exam Priorities which we think are of particular interest to the alternative asset management community.
Fee Disclosures and Conflicts of Interest
Proper disclosure and calculation of fees, expenses, and other charges investors pay will continue to be scrutinized. Examiners will also review fees charged to advisory accounts, particularly where the fee is dependent on the value of the account, to assess whether assets are valued in accordance with investor agreements, disclosures, and the firm’s policies and procedures.
In our opinion, allocation methodology of costs and expenses born by the management companies and the related funds could be reviewed.
Never Before Examined RIA's
If you have never gone through a SEC Examination, 2018 may be your year, as the SEC will be focusing on advisers which have never been through an examination. Now would be good time to conduct a mock regulatory exam in order to best prepare.
Mock Exams can:
- Help prepare for regulatory exams and the related process
- Identify potential deficiencies which should be proactively addressed
- Better position firms for compliance with regulators’ cybersecurity guidance
Electronic Advice
Additionally, Electronic Investment Advice will be highlighted within the exam. Investment advisers and broker-dealers, including “robo-advisers,” that offer investment advice through automated or digital platforms should take note.
Examinations will focus on registrants’ compliance programs, including the oversight of computer program algorithms that generate recommendations, marketing materials, investor data protection, and disclosure of conflicts of interest.
Quant funds beware!
Cyber Security
Perhaps most notably, because “the scope and severity of risks that cyber threats present have increased dramatically,” cybersecurity will be prioritized at the forefront of examinations. Such “examinations have and will continue to focus on, among other things, governance and risk assessment, access rights and controls, data loss prevention, vendor management, training, and incident response.”
You can read more about 2018 National Exam Program Examination Priorities here.
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