As capital markets shift and the risks to market participants change, so do the focus areas of routine SEC exams. Below are trending items from recent examinations:
KEY FOCUS POINTS:
- Environmental, social, and governance (ESG) practices: ESG strategies have received much attention in recent years as they appeal to many retail and institutional investors. The SEC is asking advisers whether they have adopted policies and procedures for ESG strategies and whether they disclose that an ESG screen will be applied to investments and how that may impact security selection.
- Fee examples in marketing materials: Advisers are required to include a fee example in the disclosures of marketing materials when showing one-on-one gross only performance. The example must be in sync with the fee schedules included in Form ADV.
- Review of mutual fund share class selection: Advisers are being evaluated on whether mutual fund holdings in client accounts are reviewed to ensure the lowest cost class available is used.
- Pandemic and business continuity plans: Examiners are looking closely at how advisers are adjusting to changes during the COVID-19 pandemic and how business continuity plans were updated in response. Steps taken to transition to remote working and the adviser’s ability to continue operations is an area of special focus.
- Valuation of private equity investments: Valuation methodologies should be in line with offering documents and changes to these methodologies should be documented and properly disclosed.
- Private fund due diligence: Proper due diligence should be conducted on private fund investments when recommending these types of investments to clients. Examiners are looking at whether the adviser performs and documents initial and ongoing due diligence on private investments held by clients.
- Review of advisory fee calculations: Advisers should ensure they are maintaining operational billing calculations. They also must review policies and procedures in addition to documenting fee billing testing, such as when testing was conducted and evidence of the fee testing itself.
- Private Fund Expenses: During examinations of private fund advisers, the SEC is evaluating whether advisers are charging certain expenses to underlying private companies in which the fund is invested.
- GIPS Policies and Procedures: In cases where the adviser claims compliance with the Global Investment Performance Standards (GIPS®), examiners are focusing on whether the adviser is following its GIPS policies and procedures and meeting other GIPS requirements.
WHAT DOES THIS MEAN FOR ME?
The SEC may initiate a routine examination of your firm at any time, especially if it has not done so in the last several years, if you are newly registered, or recently had a change of CCO. Even for firms that are currently undergoing an exam, the SEC has supplemented its request list to include questions about pandemic response and business continuity policies and procedures.
Fairview can help your firm prepare for and respond to SEC exam requests, even as these procedures have become remote in recent months. Contact us for more information about how Fairview can build and maintain a full compliance program for your firm.