and OCIE Exam Hot Buttons Navigating Form ADV Amendments and - PowerPoint PPT Presentation

Presenting a live 90-minute webinar with interactive Q&A Investment Adviser Compliance and Reporting: Latest Developments and OCIE Exam Hot Buttons Navigating Form ADV Amendments and Preparing for OCIE Examination Priorities, Including New Scrutiny on ERAs WEDNESDAY, FEBRUARY 17, 2016 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Cary J. Meer , Partner, K&L Gates , Washington, D.C. Beth Clark, Of Counsel, K&L Gates , Washington, D.C. Alan K. Halfenger, Partner, ACA Compliance Group , Boston The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .

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Investment Adviser Compliance and Reporting: Latest Developments and OCIE Exam Hot Buttons February 17, 2016 Cary J. Meer Beth Clark Alan Halfenger K&L Gates LLP, Washington, DC K&L Gates LLP, Washington, DC ACA Compliance Group, Boston and New York City 202.778.9432 617.589.0904 202.778.9107 beth.clark@klgates.com ahalfenger@acacompliancegroup.com cary.meer@klgates.com DC 9964926 v.5

CURRENT OCIE HOT BUTTONS FOR REGISTERED INVESTMENT ADVISERS AND EXEMPT REPORTING ADVISERS

Examination Trends: From OCIE’s Mouth to Your Ears “We collect information on everyone. We analyze information on everyone. I think people assume, if they’re not the 9%, the other 91% are out there doing things off the radar screen. But the SEC has gotten very proficient through hiring and staffing and resourcing of financial engineers…” Drew Bowden, Former Director, OCIE Source: Exams Not the Only Scrutiny, OCIE Official Warns , Compliance Reporter, October 31, 2012 7

Examination Trends 11,438 advisers 2,693 ERAs 16,000 mutual funds 37,000 private funds Source: U.S. Securities and Exchange Commission, SEC Fiscal Year 2014 Agency Financial Report , November 17, 2014 8

Examination Trends: Cycle “… although the staff examined 10 percent of investment advisers in FY 2014, these advisers represented more than 30 percent of the overall assets under management .” Source: U.S. Securities and Exchange Commission, FY 2014 Annual Performance Report , February 2, 2015 9

Examination Trends: Observations  45% of respondents have undergone an SEC Exam  50% of private equity managers that registered as a result of Dodd-Frank have had an SEC Exam  28% of hedge fund managers that registered as a result of Dodd-Frank have had an SEC Exam Source: 2015 Alternative Fund Manager Compliance Survey , ACA Compliance Group, August 2015 10

Examination Trends: Results 2010 2011 2012 2013 2014 Percentage that identifies 72% 82% 80% 80% 76% deficiencies Percentage with 42% 42% 42% 35% 30% “significant finding” 1 Percentage referred to 13% 12% Enforcement Source: SEC’s FY 2016 Congressional Budget Justification 1 A “significant finding” is one that may cause harm to customers or clients of a firm, have a high potential to cause harm, or reflect recidivist misconduct 11

Examination Trends: Significant Findings Examiners find a wide range of deficiencies during examinations. Some of the deficiencies are more technical in nature, such as failing to include all information that is required to be in a record. However, other deficiencies may cause harm to customers or clients of a firm, have a high potential to cause harm, or reflect recidivist misconduct. The latter deficiencies are among those categorized as “significant.” ~ 30% of exams result in significant findings Source: U.S. Securities and Exchange Commission, FY 2014 Annual Performance Report , February 2, 2015 12

SEC Examination Priorities  OCIE’s 2016 focus on three thematic areas:  Retail Investors  Assessing Marketwide Risks  Use of Data Analytics to identify signs of potential illegal activity  Thematic areas are identical to 2015 13

Examination Priorities – Retail Investors 2016 2015   ReTIRE Initiative Fee selection and reverse churning  Exchange- Traded Funds’  Sales practices used with regard compliance with exemptive relief, sales strategies, trading to the movement and practices, etc. supervision of retirement assets   Supervision of branch office staff Suitability of recommendations to invest retirement assets  Fee selection and reverse  churning Supervision of branch office staff “Alternative” investment   Variable annuity sales suitability companies   Public pension advisers and Fixed-income investment potential conflicts of interest companies 14

Examination Priorities – Marketwide Risks 2016 2015   Cybersecurity Monitoring the largest U.S. broker-dealers and asset  Regulation Systems managers to assess individual Compliance and Integrity firm risks and maintain early entities’ policies and awareness of developments procedures industrywide  Liquidity controls of mutual  Annual examinations of all funds, ETFs, and private systematically important clearing funds with exposure to illiquid agencies fixed-income securities  Cybersecurity  Annual examinations of all  systematically important clearing Potential equity order routing agencies conflicts 15

Examination Priorities – Data Analytics 2016 2015   Identify individuals with a track Identify individuals with a track record of misconduct and examine record of misconduct and examine the firms that employ them the firms that employ them   Pump-and-dump schemes or market Pump-and-dump schemes or market manipulation of microcap stocks manipulation of microcap stocks   Identify and examine introducing Identify and examine introducing brokers and registered brokers and registered representatives that appear to be representatives that appear to be engaged in excessive trading engaged in excessive trading   Broker-dealer anti-money laundering Broker-dealer anti-money laundering programs programs  Suitability issues and breaches of fiduciary obligations in promotion of new, complex, and high-risk products 16

Examination Priorities – Other Initiatives 2016 2015  Examinations of newly registered  Examinations of newly municipal advisors registered municipal advisors  Private placement due  Examinations of proxy advisory diligence, disclosure, and suitability service firms  Never-before-examined  Never-before-examined investment advisers and investment companies investment companies  Private fund adviser fees and  Private equity fees and expenses and side-by-side expenses management practices   Transfer agents’ safeguarding Examinations of transfer agents, of securityholder funds especially those involved with  Reviews of exempt reporting microcap securities and private advisers offerings 17

OVERVIEW OF KEY 2015 INVESTMENT ADVISER ENFORCEMENT CASES

Chair White on Enforcement “Vigorous and comprehensive enforcement protects investors and reassures them that our financial markets operate with integrity and transparency, and the Commission continues that enforcement approach by bringing innovative cases holding executives and companies accountable for their wrongdoing sending clear warnings to would- be violators.” Source: SEC Announces Enforcement Results for FY 2015 , SEC Press Release, 2015-245 (October 22, 2015) 19