SEC begins process toward compliance exams for newly registered managers

SEC seal

The SEC introduced a new “presence exam” campaign for private investment advisers, including hedge fund and private equity firms, that no longer are exempt from registering with the agency, thanks to changes enacted as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

As of March 30, that included private fund managers with at least $150 million in assets under management.

The initiative calls for risk-based examinations of private fund investment advisers over the next two years, according to a letter sent Tuesday to thousands of the newly covered advisers from Drew Bowden, acting national associate director of the Securities and Exchange Commission's office of compliance inspections and examinations.

The first of three phases, engagement, involves outreach efforts to inform advisers of their overall obligations, the new presence exams, “and OCIE's practice of engaging directly with firms' senior management,” Mr. Bowden wrote.

SEC officials will also conduct meetings and seminars with the money management firms' chief compliance officers.

Target areas for the exams will be portfolio management, conflicts of interest, safety of client funds and asset valuation.

Gerald Francese, a partner with DLA Piper's corporate and finance practice who consults with hedge fund and private equity manager clients, notes that while previously unregistered investment advisers were subject to regulation and primarily complaint-driven examinations in the past, the new presence exams “are not meant to be a 'gotcha' exercise. It's more of a 'let's learn together and set the stage for future regulatory interaction' exercise.”