Presence Exams - the SEC's New Initiative for Private Fund Managers
Managers of private investment funds that registered with the SEC since the passage of the Dodd-Frank Act must take the necessary steps to be fully prepared for a visit from the SEC within the next two years. Summary
The SEC, on October 9, 2012, launched a new initiative through its National Exam Program (the "NEP") to conduct "Presence Exams" of newly-registered managers to private funds. The Presence Exams Letter (the "Letter") was emailed to investment advisers' CCOs and other senior executives and principals, and posted on the SEC's website. Please note that the Letter was widely distributed -- its receipt does not indicate that you have been selected for a Presence Exam. Should you be chosen to undergo a Presence Exam, the SEC will contact you through a separate communication.
Presence Exams of Certain Newly-Registered Investment Advisers
Presence Exams will be focused, risk-based exams of newly-registered investment advisers (defined in the Letter as those investment advisers that registered with the SEC after July 21, 2011 - the effective date of the Dodd-Frank Act). This initiative will take place over the next two years and will be conducted in three primary phases: engagement; examination, and; reporting.
1. Engagement Phase: This is a nationwide outreach by the NEP to inform newly-registered advisers of their obligations under the Investment Advisers Act of 1940 and the Presence Exams. As part of this effort, the NEP has posted a variety of informational and reference materials on the SEC's website, including no-action and interpretive letters, enforcement cases, and links to relevant rules and laws.
2. Examination Phase: Expected to begin shortly, the SEC will conduct focused exams of selected advisers and review any or all of the following subjects that SEC staff consider high-risk: a. Marketing - Includes marketing materials and investor-solicitation practices, and the use of placement agents, among other items b. Portfolio Management - Includes disclosures and allocation practices, among other items c. Conflicts of Interest - Includes personal trading, fees, sources of revenue, and payments to related persons, among other items d. Safety of Client Assets - Includes review of custody practices e. Valuation - Includes fair valuation methods and fee calculation, among other items
If your firm is selected for a Presence Exam, once the on-site examination is complete you may receive a letter from the NEP discussing its findings, including any deficiencies. Serious deficiencies could result in further regulatory action.
3. Reporting Phase: Following the Examination Phase, the NEP plans to report its findings to the SEC and the public regarding topics such as: common practices identified in the higher-risk focus areas; industry trends, and; significant issues identified.
Please note that it is imperative to properly maintain the required books and records so that materials requested by the SEC can be produced promptly as needed.