“A significant percentage of new registrants” will be subject to “coordinated examinations…focusing on the highest risk areas of their business,” Carlo di Florio, the director of the SEC Office of Compliance Inspections and Examinations, said, according to Reuters.
Fourteen of the world’s largest 50 hedge fund advisers and 18 of world’s 50 largest private equity funds recently registered with the SEC, a requirement of the 2010 Dodd-Frank Act.
The examinations are part of a three-step process beginning with the sharing of the SEC’s OCIE expectations with private equity firms. The process finishes with end reports on the risks and issues identified by OCIE.
Using past experience acquired through the examinations of similar firms, OCIE developed initial risk factors used to assess the firms. The SEC is in the process of developing systems that would organize and evaluate information supplied by firms on Form ADV for advisers and Form PF for private funds. Form PF is a relatively new form used by private fund advisers to report potential systemic risks to the Financial Stability Oversight Council.
The SEC is also currently in the process of developing a system to ensure that examiners can access data necessary for a comprehensive examination and understanding of a firm. Di Florio said that OCIE is working to ensure that the information acquired through the examination process remains confidential, according to Reuters.
The pre-examination process will include a review of the funds a firm advises, though the exams are designed to assess whether a firm’s compliance program meets the requirements of the Investment Advisers Act of 1940. This includes adopting and implementing an ethics code, assigning a chief compliance officer, maintaining accurate records, annual updates of the ADV, and ensuring that advertising and reporting complies with SEC statutes.
The agency will also evaluate whether PE advisers fairly allocate fees, clearly disclose the fees to clients and report the fees entirely, accurately and within a timely manner, Reuters reports.