investment adviser workshop - hirschler · pdf file · 2012-10-18investment adviser...

COMPLIANCE GROUP

Investment Adviser WorkshopHow to Survive an Examination by the New SEC

Gary C. WatkinsGary C. WatkinsACA Compliance GroupACA Compliance Group

S. Brian FarmerS. Brian FarmerHirschler FleischerHirschler Fleischer

May 12, 2011

22 22COMPLIANCE GROUP

The Examination ProcessThe Examination Process

Types of ExaminationsTypes of Examinations

RoutineRoutine

Sweep ExamsSweep Exams

For CauseFor Cause

Frequency of Routine ExamsFrequency of Routine Exams

Initial ExamInitial Exam

Risk Based DeterminationRisk Based Determination


The Examination ProcessThe Examination Process

Possible OutcomesPossible Outcomes

Closing letter with No DeficienciesClosing letter with No Deficiencies

Deficiency Letter (opportunity toDeficiency Letter (opportunity torespond)respond)

Referral to EnforcementReferral to Enforcement


The Examination TimelineThe Examination Timeline

Initial notificationInitial notification

Initial SEC request listInitial SEC request list

Initial presentationInitial presentation

Initial document productionInitial document production

InterviewsInterviews

OnOn--site examinationsite examination

Review of documentsReview of documents

Deficiency orDeficiency or ““No FurtherNo Further

ActionAction”” LetterLetter

Additional document requestsAdditional document requests

Exit InterviewExit Interview


Recent Changes to the SECRecent Changes to the SECExam ProgramExam Program

OCIE enhancementsOCIE enhancements

New Leadership Team and GovernanceNew Leadership Team and GovernanceStructureStructure

SpecializationSpecialization

Conducting RiskConducting Risk--Based ExamsBased Exams

Focus on Assumption and Management of RiskFocus on Assumption and Management of Risk

Focus on Incentive CompensationFocus on Incentive Compensation

Oversight of RiskOversight of Risk



Coordinating BrokerCoordinating Broker--Dealer and InvestmentDealer and InvestmentAdviser ExamsAdviser Exams

New uniform manual for examinersNew uniform manual for examiners

Promote consistency and goal toPromote consistency and goal to ““nationalizenationalize””the Exam processthe Exam process



New exam initiativesNew exam initiatives

Firms that have not previously been examinedFirms that have not previously been examined

ReviewReview ““commitment to establishing andcommitment to establishing andmaintaining an effective compliance culturemaintaining an effective compliance culture””

Determine whether to conduct moreDetermine whether to conduct morecomprehensive examcomprehensive exam

Pilot program in six Regional OfficesPilot program in six Regional Offices

Improve consistency across eleven regionsImprove consistency across eleven regions

RiskRisk--based, not routinebased, not routine

Firms with a history of ignoring prior warningsFirms with a history of ignoring prior warnings



SEC Examination and Enforcement PrioritiesSEC Examination and Enforcement Priorities

Custody/safety of investor assetsCustody/safety of investor assets

Access to and use of MNPIAccess to and use of MNPI

Offering materials and disclosuresOffering materials and disclosures

Abusive marketing practices and performanceAbusive marketing practices and performanceadvertisingadvertising

Investment guidelines and restrictions (Investment guidelines and restrictions (““stylestyle--driftdrift””))

Market manipulation (rumorMarket manipulation (rumor--mongering/frontmongering/front--running)running)




Personal and institutional conflicts of interestPersonal and institutional conflicts of interest Valuation of assetsValuation of assets Controls/Processes of Advisers experiencingControls/Processes of Advisers experiencing

recent change in controlrecent change in control

Structured products/disclosuresStructured products/disclosures Conflicts of interestConflicts of interest--personal andpersonal and

institutionalinstitutional Personal trading, insider trading and fraudPersonal trading, insider trading and fraud

(expert networks)(expert networks)




Maintenance and production of books andMaintenance and production of books andrecordsrecords

Investor privacyInvestor privacy AntiAnti--money launderingmoney laundering Business continuity and disaster recoveryBusiness continuity and disaster recovery Brokerage arrangements/ executionBrokerage arrangements/ execution Trade allocationTrade allocation Supervision/corporate governanceSupervision/corporate governance


Tips to Prepare for the SECTips to Prepare for the SEC

Be proactive and set the right toneBe proactive and set the right tone

Know your policies and proceduresKnow your policies and procedures

Identify key risk areasIdentify key risk areas

Organize books and records ahead of timeOrganize books and records ahead of time

Educate/train employees includingEducate/train employees including ““how tohow tospeak to an SEC examinerspeak to an SEC examiner””

Prepare abstracts/summaries of compliancePrepare abstracts/summaries of complianceprogramprogram



Allocate appropriate resources (funds,Allocate appropriate resources (funds,technology and personnel)technology and personnel)

Conduct mock examinations and complianceConduct mock examinations and compliancereviewsreviews

Organize an SEC examination response teamOrganize an SEC examination response team

Understand that documentation andUnderstand that documentation and““appearancesappearances”” are criticalare critical



Prevent potential problems:Prevent potential problems:

Electronically store broker statements inElectronically store broker statements in--househouse

Keep Code of Ethics/Compliance logs up toKeep Code of Ethics/Compliance logs up todatedate

Keep accurate trade error logsKeep accurate trade error logs

Keep wellKeep well--organized personal trading filesorganized personal trading files

Organize shared drives and physical foldersOrganize shared drives and physical folders



Before the SEC arrivesBefore the SEC arrives——The LogisticsThe Logistics

Review the latest SEC initial inspectionReview the latest SEC initial inspectionrequest listrequest list

Assemble the SEC Exam Response TeamAssemble the SEC Exam Response Team

Know where your documents are locatedKnow where your documents are located

Identify working space and resources forIdentify working space and resources forexaminersexaminers



Make sure offices are presentableMake sure offices are presentable——appearances matterappearances matter

Review website, ADV, prior exam results,Review website, ADV, prior exam results,annual compliance reviews, risk matrixannual compliance reviews, risk matrix

Coordinate with counsel/consultants forCoordinate with counsel/consultants for ““realreal--timetime”” feedback onfeedback on ““hot topicshot topics”” and review ofand review ofresponses/document productionresponses/document production

Identify and segregate legally privilegedIdentify and segregate legally privilegeddocuments and create a privilege logdocuments and create a privilege log


SEC Examination Request ListSEC Examination Request List General information to provide an understandingGeneral information to provide an understanding

of the adviserof the adviser’’s business and investment activities.s business and investment activities.

Information about the adviserInformation about the adviser’’s risk matrixs risk matrix

Documents relating to adviser internal testing toDocuments relating to adviser internal testing todetermine how effectively the adviser hasdetermine how effectively the adviser hasimplemented its compliance policies andimplemented its compliance policies andprocedures.procedures.

Steps taken by the adviser to address the resultsSteps taken by the adviser to address the resultsof compliance reviews, quality control, or testsof compliance reviews, quality control, or testsconducted.conducted.

Information to perform testing for compliance inInformation to perform testing for compliance invarious areas.various areas.


Working With the StaffWorking With the StaffDuring an ExaminationDuring an Examination

Graciously receive examGraciously receive examnotice/announcementnotice/announcement

CCO should be primary point of contactCCO should be primary point of contactand project managerand project manager

Contact SEC examiner upon receipt of noticeContact SEC examiner upon receipt of notice

Put key personnel on notice and clearPut key personnel on notice and clearcalendarscalendars

Lead document productionLead document production



Present summary of operations andPresent summary of operations andcompliance program on first day of oncompliance program on first day of on--sitesiteexam to properlyexam to properly ““frameframe”” business andbusiness andoperationsoperations

Coordinate and attend interviewsCoordinate and attend interviews

Instruct personnel not to interact with SECInstruct personnel not to interact with SECother than through interviews.other than through interviews.



Foster constructive dialogue andFoster constructive dialogue andrelationship with examinersrelationship with examiners Be honest and set the right toneBe honest and set the right tone——youryour

credibility is yourcredibility is your ““currencycurrency””

CheckCheck--in often, but not too oftenin often, but not too often

Determine what type of exam if you canDetermine what type of exam if you can(sweep, routine, cause, etc.)(sweep, routine, cause, etc.)



Ask for interpretations and negotiate overAsk for interpretations and negotiate overrequests, production and deadlinesrequests, production and deadlines

Be clear about what is and is not beingBe clear about what is and is not beingproduced and whyproduced and why



Record and Document ProductionRecord and Document Production Bring issues to supervisorsBring issues to supervisors

Mirror SEC production for your referenceMirror SEC production for your reference

Bates numberingBates numbering

Log of search termsLog of search terms



Segregate privileged documents and maintainSegregate privileged documents and maintainloglog

Alert staff of problems before they highlightAlert staff of problems before they highlightthem for youthem for you

Maintain log of searches, documentMaintain log of searches, documentproduction, and which documents have notproduction, and which documents have notbeen produced and whybeen produced and why



OnOn--site Examssite Exams——Other ConsiderationsOther Considerations

Make sure employees are cognizant ofMake sure employees are cognizant ofexaminers onexaminers on--sitesite

Offer staff telephone, water, coffee,Offer staff telephone, water, coffee,bathrooms, etc.bathrooms, etc.

Convey a sense of urgency, but professionalConvey a sense of urgency, but professionalcalmcalm

Keep work behind closed doorsKeep work behind closed doors



Be prepared for request for eBe prepared for request for e--mail productionmail productionand reviewand review

Keep notes of interaction with staffKeep notes of interaction with staff

Request staff requests/questions in writingRequest staff requests/questions in writing

Cease any automated record/eCease any automated record/e--mailmaildestructiondestruction



Staff InterviewsStaff Interviews

Get outside help to prepare witnesses asGet outside help to prepare witnesses asnecessarynecessary

““ChaperoneChaperone”” all staff interviewsall staff interviews

Treat interviews as depositions or OTRsTreat interviews as depositions or OTRs

Listen to the questionListen to the question

Answer only the question being askedAnswer only the question being asked

DonDon’’t volunteer informationt volunteer information

Take notesTake notes



Exit InterviewExit Interview

Request an exit interview so you can proRequest an exit interview so you can pro--actively address anyactively address any ““materialmaterial”” issues andissues andset expectations internally and with the SECset expectations internally and with the SEC

Remember that exam is not over justRemember that exam is not over justbecause examiners have left your locationbecause examiners have left your location ––counsel staff on postcounsel staff on post--site visit esite visit e--mailmailcommentscomments



Be responsive to SEC requests after theBe responsive to SEC requests after theonon--site portion of the examination issite portion of the examination isconcludedconcluded

Be patient and deliberate in yourBe patient and deliberate in yourcommunications with the SEC after thecommunications with the SEC after therequests ceaserequests cease



Drafting responsesDrafting responses

Opportunity to educate staffOpportunity to educate staff

Be truthful and candidBe truthful and candid

Use hedging languageUse hedging language

Our current understanding; we believe;Our current understanding; we believe;based on reasonable inquirybased on reasonable inquiry



Supplementing the responseSupplementing the response

Contact regulator or perform internalContact regulator or perform internalinvestigation if submissions are inaccurateinvestigation if submissions are inaccurateor incompleteor incomplete

SelfSelf--reporting is better received by thereporting is better received by thestaffstaff


PostPost--ExaminationExamination

Possible outcomesPossible outcomes

Examination Closing LetterExamination Closing Letter——No deficienciesNo deficiencies

Deficiency letterDeficiency letter——The Likely OutcomeThe Likely Outcome

Ask for clarification if unsure of anythingAsk for clarification if unsure of anything

Specify steps to correct deficiencies or advocateSpecify steps to correct deficiencies or advocateyour position on an identified issueyour position on an identified issue

Do what you promise to do!Do what you promise to do!

Enforcement Referral and furtherEnforcement Referral and furtherinvestigationinvestigation——A bad outcomeA bad outcome


RisksRisks –– Possible Risk AreasPossible Risk AreasIdentified by the SECIdentified by the SEC

Adviser relies heavily on a paperAdviser relies heavily on a paper--basedbasedrecordrecord--keeping system.keeping system.

Adviser continuously updates its website.Adviser continuously updates its website. Adviser manages several strategies and hasAdviser manages several strategies and has

varying account types (i.e., institutional,varying account types (i.e., institutional,retail, pooled investment vehicles).retail, pooled investment vehicles).

Adviser regularly loses existing clients andAdviser regularly loses existing clients andobtains new clients.obtains new clients.



Adviser employs portfolio managers withAdviser employs portfolio managers withimpressive performance returns that wereimpressive performance returns that wereearned while employed elsewhere.earned while employed elsewhere.

Adviser completes requests for proposalsAdviser completes requests for proposalsand/or provides information forand/or provides information forperformance and consultant databases.performance and consultant databases.



Thinly traded securities, derivatives, orThinly traded securities, derivatives, orother difficultother difficult--toto--value investments arevalue investments areincluded in performance figures.included in performance figures.

Adviser manages private fundsAdviser manages private funds

Adviser selfAdviser self--custodiescustodies



The adviser has limited personnel resources.The adviser has limited personnel resources.

Advisory staff performs multiple functions (suchAdvisory staff performs multiple functions (suchas compliance oversight and marketing)as compliance oversight and marketing)

Portfolio managersPortfolio managers’’ compensation iscompensation isperformanceperformance--based.based.

Performance is heavily marketed and isPerformance is heavily marketed and isresponsible for most of the adviserresponsible for most of the adviser’’s news newbusiness.business.


Recent SEC SweepsRecent SEC Sweeps

Sweep of RIAs regarding how clients managedSweep of RIAs regarding how clients managedassetasset--backed securitiesbacked securities

Sweep of RIAs regarding use of social mediaSweep of RIAs regarding use of social mediaand networkingand networking

Policies and proceduresPolicies and procedures

TrainingTraining

Disciplinary ActionsDisciplinary Actions

Sweep of RIAs regarding due diligenceSweep of RIAs regarding due diligenceprocessesprocesses

Vetting of prospective investmentsVetting of prospective investments

Periodic reviewPeriodic review