On January 11, 2016, the staff of the Office of Compliance Inspections and Examinations (OCIE) of the Securities and Exchange Commission (SEC) released its annual announcement on examination priorities in the coming calendar year. While the announcement contains broad and general descriptions of areas in which the staff intends to focus, there are several key points to which advisers to hedge funds, private equity funds and other private funds should pay close attention:
- In re-committing to focus on fees and expenses allocated and charged by private fund advisers, the staff appears to indicate that practices remain which it seeks to review and influence through its examination programs.
- The staff references an interest in reviewing advisers to private funds that have exposure to potentially illiquid fixed income securities.
- The staff will expand its focus in the area of cybersecurity to include the testing and assessments of advisers’ implementation of procedures and controls.
- The staff stated it would be reviewing “whether legal requirements are being met in the areas of due diligence, disclosure and suitability.”
- The announcement also referenced the staff’s interest in reviewing controls and disclosure associated with side-by-side management of performance-based and purely asset-based fee accounts.
- The staff’s 2016 announcement also notes a focus on pay-to-play and certain other key risk areas related to advisers to public pensions, including identification of undisclosed gifts and entertainment. Advisers would be prudent to review their pay-to-play policies, confirm that recordkeeping requirements are complied with, and ensure that all staff members are adequately educated on the requirements.
- The announcement discloses that the staff will continue to review the supervision of adviser representatives in brand offices of SEC-registered advisers, including data analytics to identify representatives in branches that appear to be engaged in potentially inappropriate trading.