SEC Compliance Outreach Program National Seminar

SEC Seal 2

The SEC’s Office of Compliance Inspections and Examinations (OCIE), Division of Investment Management, and the Asset Management Unit of the Division of Enforcement jointly sponsor the compliance outreach program. On January 30, 2014, there was a national meeting.

These are my notes.

Welcoming Remarks from Chair Mary Jo White

Investors and the SEC relies on compliance officers. OCIE has only 450 dedicated who have to look over 11,000 registered investment advisers. The top goal is getting firms to express a dedication to compliance throughout the organization. She highlighted the exam priorities for 2014.

Introductory Remarks


  • Drew Bowden, Director, Office of Compliance Inspections and Examinations
  • Norm Champ, Director, Division of Investment Management
  • Andrew Ceresney, Director, Division of Enforcement

Andrew started off as the person you don’t want to meet. If your talking to enforcement, you are being accused of doing something seriously wrong. One focus is firms with past problems. The first thing examiners will do is look at the deficiencies from an exam and see if the firm has fixed those noted problems. Custody is a critical rule because its focus is on the safety of client assets.

He highlighted a case his group brought under Rule 38a-1(c) of the 1940 Investment Company Act. That rule makes it unlawful to mislead or obstruct a firm’s CCO in the performance of his or her duties. Andrew also highlighted the Convergex case for failing to highlight markups and markdowns.

Norm highlighted the guidance and updates issued by the SEC. The initiative came out of failed no-action letters. The SEC would deny the relief, but that denial was rarely public. He highlighted the guidance update on misleading fund names and the guidance on the custody rule for private stock certificates.

He also highlighted some facts on the new public private-placement rules under 506(c). He is not seeing a lot of use of the new regime.

The SEC’s goals are to be transparent. The vast majority of investment advisers are trying operated in a proper and ethical way. The panel clearly highlighted custody as an item subject to close scrutiny.

Panel I: Program Priorities


  • Jane Jarcho, National Associate Director, National Exam Program
  • David Grim, Deputy Director, Division of Investment Management
  • Julie Riewe, Co-Chief, Division of Enforcement, Asset Management Unit

Julie highlighted the aberrational performance inquiry initiative. The mismatched performance usually lead to to a large cache of other misdeeds at the adviser. On the private fund side of things, the SEC is looking at conflicts of interest, allocations of opportunities, mis-allocations of expenses.  She highlighted multiple funds investing in the same opportunity. (Are you using the second investment to prop up the first?)

David focused on the floating NAV for money market funds (I hate that idea.) and other mutual fund reporting issues.  He expects a new rule-making proposal on target date funds.

Jane talked about the selection of priorities and the priorities for the upcoming year and rest of the panel joined in.

  1. Wrap fee program
  2. JOBS Act
  3. Cybersecurity
  4. IA-BD harmonization

Examiners are looking at certain aspects of wrap fee programs. It starts with a suitability policy and procedure. Do you have one and is it being followed?

There is a clear focus on the issues that will arise from lifting the ban on general solicitation. He acknowledged the murkiness caused by releasing the proposed rules for investor protection on the same day as the adoption. This will be a big priority for 2014.

Question & Answer Session (Advisers with $1 Billion or Less in Regulatory AUM)

25% of the registered advisers have more than $1 billion under management’ 62% have less than $500 million and 12% are between $1 billion and $500 million.

Panel II: Private Fund Adviser Topics

  • Ashish Ward, Exam Manager, National Exam Program, Los Angeles Regional Office
  • Alpa Patel, Senior Counsel, Division of Investment Management
  • Igor Rozenblit, Specialist, Division of Enforcement, Asset Management Unit
  • James Capezzuto, General Counsel & Chief Compliance Officer, Cornerstone Capital Management LLC
  • Barbara Burns, Chief Compliance Officer, AEA Investors SBF LLC
Key focus areas in presence exams: (1) investment conflicts of interest, which includes allocation of opportunities and fees, (2) Marketing, in particular performance marketing, (3) valuation and (4) custody. The SEC has conducted about 250 exams and found numerous issues in these areas.
Fees need to be disclosed, including fees charged to portfolio companies and expenses charged for back-office operations. Are you generating additional revenue for the management company while reducing cash to the funds.
The panel pointed out Rule 206(4)-8 that looks through the fund to investors in the fund for fraudulent, deceptive or manipulative acts.

Panel III: Registered Investment Company

This was not relevant to me, so I skipped this session.

Panel IV: Valuation Issues

  • Matthew O’Toole, Senior Special Counsel, National Exam Program, San Francisco Regional Office
  • Leo Chan, Senior Specialized Examiner, National Exam Program, San Francisco Regional Office
  • Sarah ten Siethoff, Senior Special Counsel, Division of Investment Management
  • Jaime Eichen, Chief Accountant, Division of Investment Management
  • Jeffrey Blockinger, Chief Legal Officer & Chief Compliance Officer, Och-Ziff Capital Management Group
The big theme is that there is no one-size-fits-all approach for valuation. There was discussion about whether the SEC would offer some guidance on valuation expectation. That sounded unlikely.
Mutual funds and BDC are required to use GAAP financing. Advisers are not as limited. However, a panelist pointed out that for private funds to comply with the custody rule, it must have GAAP financials.

Panel V: Chief Compliance Officer Obligations

  • Mark Dowdell, Assistant Director, National Exam Program, Philadelphia Regional Office
  • Janet Grossnickle, Assistant Director, Division of Investment Management
  • Marshall Sprung, Co-Chief,Division of Enforcement, Asset Management Unit
  • Chris Marzullo, General Counsel & Chief Compliance Officer, Brandywine Global Investment
  • Management LLC
  • Judy Werner, Executive Director, National Society of Compliance Professionals
I missed this session.

Closing Remarks

by Drew Bowden, Director, National Exam Program
I missed this session.