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Examination Priorities for 2014

The SEC has released a list of its examination priorities for 2014, covering areas the SEC staff believes have heightened risk.  Some initiatives are applicable to all SEC registrants, and some are uniquely applicable to the asset management industry.

One of the broad initiatives of the examination program is entitled “Corporate Governance, Conflicts of Interest, and Enterprise Risk Management.”  This priority, which carries over from last year, contemplates that the SEC staff will look at “how each firm identifies and mitigates conflicts of interest and legal, compliance, financial, and operational risks. This initiative is designed to: (i) evaluate firms’ control environment and “tone at the top,” (ii) understand firms’ approach to conflict and risk management, and (iii) initiate a dialogue on key risks and regulatory requirements.”

Priorities in the investment adviser/investment company area include the following:

  • Safety of assets and custody
  • Conflicts of interest inherent in certain investment adviser business models
  • Marketing/performance
  • Never-before examined advisers
  • Wrap fee programs
  • Quantitative trading models
  • Presence exams
  • Payments for distribution in guise and
  • Fixed income investment companies.

While many of these are very similar to the 2013 priorities, some are more specific than in the past.  For example, the category “conflicts of interest” includes undisclosed compensation arrangements, allocation of investment opportunities and side-by-side management of performance-based and asset-based fee accounts, and “risk controls and disclosure, particularly for illiquid investments and leveraged investment products and strategies.”

This year’s emphasis on “quantitative trading models” is entirely new, as is the inclusion of “fixed income investment companies.”  For that item, the release merely notes that “[t]he staff will monitor the risks associated with a changing interest rate environment and the impact this may have on bond funds and related disclosures of risks to investors.”

Several of the examination priorities explicitly mention boards, including “alternative funds” and “payments for distribution in guise.”  Both categories appeared on the 2013 priorities list.  The 2014 “alternative funds” priority explains that the staff will be looking at, among other items, “the staffing, funding, and empowerment of boards, compliance personnel, and back-offices.”  The 2014 priority involving review of payments made to distributors and intermediaries explains that the staff will examine “the adequacy of disclosure made to fund boards about these payments, and boards’ oversight of the same. The staff will assess whether such payments are, in fact, payments for distribution and preferential treatment.”

The full list of examination priorities for 2014 is available here.