The SEC comes a knockin'

Five months after the infamous Dodd-Frank Act registration deadline, the US Securities and Exchange Commission (SEC) continues to visit the newest members of the registered investment advisor club.

SEC staff have been notifying newly-registered firms of their pending on-site examinations typically about one week before the examiners’ actual visit.

Based on anecdotal evidence, it appears that examiners are spending relatively less time onsite with new registrants than they do during routine advisor exams — the new registrant exams seem to be lasting less than a week. As the scope of these exams remains broad, these shortened reviews by necessity cover issues at a higher level. These condensed, higher-level reviews appear designed to help the SEC’s examination staff visit more newly-registered advisors in a shorter period of time, determine where these advisors fall on the risk spectrum, and identify which advisers should be subject to further, more in-depth examinations.

ACA has reviewed copies of several initial document request letters sent to new registrants. Of particular note, the letters request documents that pre-date the Dodd-Frank Act registration deadline, in some cases by as much as a year. Under Section 204 of the Investment Advisers Act of 1940 (“Advisers Act”), SEC examiners are authorised to request and inspect all records held by registered advisors, even those that are not specified in the books and records rule (i.e., Advisers Act Rule 204-2). In addition, with respect to performance-related records, the SEC’s implementing release discussing the Advisers Act amendments under the Dodd-Frank Act expressly states that while new registrants may not have been obligated to keep certain performance-related records for any period when they were not SEC-registered, after registration they must preserve such records to the same extent as they did prior to registration. 

Of course, the manner, methods, and organisation used by advisors to maintain these and other records prior to registration may differ substantially from the way they are required to maintain books and records created post registration. It remains to be seen how SEC examiners will view discrepancies in pre- and post-registration recordkeeping practices.

Recently-registered private equity, real estate, and hedge fund managers should consider how they will respond to an SEC document request letter that covers pre-registration documents. Some firms may choose to produce all records requested, without seeking to negotiate the time frame or scope of the request. Other firms may want to first discuss with SEC examination staff what records they have available, how long those records have been maintained, and the form in which those records appear. 

This discussion could be particularly useful if producing preregistration records that would require significant time or effort. Advisors may only be given a few days’ notice to prepare for an onsite visit from the SEC. As such, firms should become familiar with the types of requests they are likely to receive and determine in advance which individuals within the firm are best able to produce each record.

Compliance professionals reviewing these requests should keep in mind that many of the records requested by the SEC staff may not be applicable to every advisor. Newly-registered advisors should consider these and other examination-related issues now.

Being prepared in advance to discuss documentation issues in a thoughtful manner with examiners will allow these advisors to make a strong impression during their first interaction with their new regulator.

Kimberly Hill Daly is a senior principal consultant at ACA Compliance.