Executive Summary: At the recent 2010 NSCP East Coast Regional Membership Meeting, a representative from the SEC indicated the SEC is looking at Registered Investment Advisory firms who have never been examined by the SEC.
Beginning in the Chicago Regional Office of the SEC in April of 2010, a document request drive began with SEC-registered advisory firms that had never been examined by the SEC. Currently, there is talk of the New York Regional Office conducting similar examinations with never-before-examined firms. There are no details released at this time that indicate this will be an ongoing occurrence enacted region by region; however, with both the Chicago and New York regional offices of the SEC undertaking this initiative, it appears this could become a national movement. Also, with talk of the SEC asset threshold increasing and as further regulations for registration of hedge fund managers becomes more prevalent, the move by the SEC to inspect investment advisors who have never been examined before could be imminent.
All reports currently show that the document request letters, which are being sent to these never-before-examined firms, are sizably downscaled from traditional request letters. This could be to utilize the documents as a "pre-screening" to determine which firms may need a more comprehensive exam.
Should the SEC find these to be helpful, pre-examinations may be seen more frequently region by region in an effort to utilize the SEC's resources to their full potential. If that is the case, there is a possibility that downscaled, pre-examination document requests may be combined with a less focused and shorter onsite examination where warranted.
In the event that the asset threshold increases from $25 million to $100 million, a number of firms will need to withdraw from SEC registration, freeing up some of the SEC's resources for examinations. However, if regulations are passed to require certain hedge fund managers to register, there is concern that the SEC's resources will become more and more limited.
It is important for firms, especially those that have not been examined by the SEC or have unregistered private funds, to make certain they have a fully established compliance program in accordance with Rule 206(4)-7 of the Investment Advisers Act and that the procedures are being followed and the procedures are being tested.
Regulatory Compliance is monitoring this exam initiative and the financial reform legislation currently in Congress. If you have questions about how either may impact your firm, please contact our investment advisor specialists at 603-434-3594.
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