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Be Prepared For Your Next SEC Examination: Recently Announced Exam Priorities for 2014

On January 9, 2014, the National Exam Program of the SEC's Office of Compliance Inspections and Examinations announced its Examination Priorities for 2014.  The priorities address both what NEP views as "market-wide" priorities, as well as industry-specific priorities for investment advisers and investment companies, broker-dealers, exchanges and SROs, and clearing or transfer agents.  Beyond the predictable priority areas (i.e., fraud, general corporate governance), there are several examination priorities worth noting:

  1. Dual Registrants:  The staff will focus on the risks and potential conflicts this business model presents, including whether customers are placed in an appropriate account-type.
  2. Never-Before Examined Advisers:  The staff will focus on advisers who have been registered for more than three years but that have not been examined yet, and are not part of the "Presence Exam" program.
  3. Continuation of "Presence Exams" for New Registrants:  The focus areas of these exams will be on marketing, portfolio management, conflicts of interest, safety of client assets, and valuation.
  4. Rule 506(c) Compliance:  The staff plans to evaluate the due diligence conducted by investment advisers and broker-dealers for offerings relying on this rule.
  5. Protection and Custody of Client Assets by Investment Advisers:  NEP remarked that it continues to see compliance with Rule 206(4)-2 as a problematic area and referred to its previously published Risk Alert on this issue.
  6. Conflict of Interests for Investment Advisers:  The focus here will be on compensation arrangements, allocation of investment opportunities, side-by-side management of performance-based and purely asset-based fee accounts, risk controls and disclosures, and high-risk strategies targeted to retail clients.
  7. Suitability of Variable Annuity Buybacks:  The guaranteed income and death benefits offered by many variable annuities have experienced a sharp increase in value over the past few years due to market conditions, and there are some initiatives aimed at repurchasing these policies.  The NEP will focus on the suitability of any such repurchase arrangements.


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Breton Leone-Quick is an attorney who advises Mintz clients in the financial services industry in litigation matters and regulatory investigations. He leverages his understanding of federal securities laws and Delaware corporate laws to navigate complex crises and disputes.