United States: SEC Announces 2015 Exam Priorities

Last Updated: January 21 2015
Article by Alexandra Poe and Aaron Bourke

Most Read Contributor in United States, October 2017

The SEC Office of Compliance Inspections and Examinations ("OCIE" or the "Staff") recently released its 2015 Exam Priorities. OCIE examines all types of SEC registrants, including investment advisers, broker-dealers, investment companies, municipal advisors and transfer agents. Each January, the release of the OCIE Exam Priorities provides a useful guide and reminder to registrants in connection with their individual compliance program and risk management reviews for the year ahead.

Exam Priorities are always a reflection of current trends and news and, in recent years, also reflect the SEC's expanded capabilities for monitoring market activity through data analytics. They are not exclusive—actual exams may, and will, cover other topics.

Here are some highlights of the OCIE 2015 Exam Priorities (with Commentary in italics):

Fees and Expenses in Private Equity: Citing the high rate of deficiencies already observed among private equity fund advisers, the Staff will continue to examine fee and expense practices and related disclosures.

We note that several firms and persons have been charged or fined for improper fee and expense practices, and the Staff has been announcing its focus in this area throughout 2014.1 Bloomberg recently reported that two leading fund managers made new disclosures that their funds will pay them additional fees (i.e., in addition to management fee and carry) of $10 million – $20 million per year. Improved disclosure practices are arguably healthy and inevitable, although improved disclosures are no assurance of "safety" with regard to prior practices, and may, in fact, put the Staff on notice of prior opacity on fees. The same story reported that a recent speech by OCIE Chief Andrew Bowden highlighted the payment of fees to "operating partners" that "walk, talk, act and look like employees or affiliates," without offsetting the management fee. According to Bloomberg, the Staff is also concerned about accelerated monitoring fees for services not yet rendered that are captured before the portfolio company is sold. Bloomberg data shows these accelerated fees total more than $1 billion charged to companies taken public since 2010.2

Alternative Investment Companies: Noting the recent rapid growth of funds promoting uncorrelated returns (the so-called "liquid alts" sector), the Staff, with respect to such funds, will focus on (1) leverage, liquidity and valuation policies and practices; (2) adequacy of internal controls, including staffing, governance and funding; and (3) marketing practices.

Funds and managers that have expanded into these products or strategies and have not yet reviewed and amended compliance, disclosure, and risk management programs accordingly, should do so promptly.

Fixed Income Investment Companies: Citing the consensus view that interest rates are expected to increase in the foreseeable future, the Staff will focus on interest-rate sensitive mutual funds, and whether they have implemented adequate compliance policies and procedures and investment and trading controls to assure that portfolio holdings and liquidity are consistent with disclosures to investors.

Protecting Retirement Investors: Keying off statistics showing that self-directed retirement assets are now twice the size of defined contribution plan assets, the Staff will focus on protecting retirement investors. They will focus on whether an adviser offers multiple types of fee arrangements and, if so, how different arrangements or account types are recommended to clients, and whether the recommendations are in the client's best interest at inception and on an ongoing basis. Factors in this area include fees charged, services provided and disclosures made. Here, OCIE calls out its concern about reverse churning (i.e., moving clients to, or keeping clients in, asset-based fee products for an underlying portfolio that is lightly traded or static, when a commission-based product would lower the client's costs). The Staff will also focus on recommendations to investors to move assets from defined contribution plans into other products, particularly whether sales practices in this regard are improper or misleading, and how those practices address any incremental risks and fees. Similarly, the Staff will evaluate registrant conduct in recommending complex or structured products and higher-yield securities. Here, the Staff will examine whether the registrant performed due diligence, made appropriate disclosures, and assessed the suitability of such products for retirement assets. They also announce that they will evaluate whether any such recommendations are "consistent with existing legal requirements" without elaborating on the meaning of this phrase in this context; presumably, existing legal requirements could range from contractual obligations to a client to regulatory limitations, such as assessing suitability, offering or selling only to properly qualified investors and using proper means of solicitation.

Multi-Office Advisors: The Staff will also focus on registrants' supervision of branch offices, and specifically the use of data analytics to identify non-compliant practices in branches.

Market-Wide Risks: Staff priorities in the area of maintaining orderly markets include focus (or continued focus) on the following subjects: (1) cybersecurity for broker-dealers and advisers; (2) annual exams for clearing agencies; and (3) large firm monitoring. In addition, the Staff is again focusing on (4) best execution – this time, the concern is whether firms are taking payments or credits for order flow into consideration when routing orders, and whether that practice is in conflict with their best execution obligations.

Best execution practices are a recurring theme in OCIE Exam Priorities because the ways in which brokers can incentivize order flow seem endlessly mutable. In fact, advisers checking their trading room practices on order flow credits this year would be wise to make sure practices around soft dollars, directed brokerage, expense offsets, and gifts & entertainment have not drifted from the last time focus on these types of inducements came around. A best execution problem is likely to be charged as a Section 206 violation, which goes to adviser integrity and can be a difficult stain on future disclosures.

Data Analytics: The Staff reminds registrants of its new capabilities to identify potentially fraudulent or illegal market activity through data analytics. OCIE will be monitoring for (1) individuals with prior misconduct records; (2) pump-and-dump schemes and other market manipulation in microcap stocks; (3) excessive trading; and (4) AML compliance. Broker-dealers that have not filed suspicious activity reports ("SARs") or that have filed incomplete SARs, and those that provide customers direct access to markets from higher risk jurisdictions, should expect to be examined.

The Staff's ability and intent to monitor persons with prior misconduct records is a new consideration for securities industry employers.

Other Initiatives: The Staff will also focus on (1) exams, outreach and education for newly registered municipal advisors; (2) exams for proxy advisory services focused on disclosure and mitigation of conflicts of interest; (3) risk-based exams of registered investment companies that have not yet had a first exam; and (4) exams of transfer agents.

We take this opportunity to remind our investment adviser clients that ADV annual updates are due within 90 days of your fiscal year end (or March 31, 2015, for most advisers), and that compliance programs must be reviewed annually and updated to reflect changes in law and regulation, as well as changes in your organization and operations. Advisers that used non-law firm service providers to accomplish registration and that have not discussed their ADV disclosures and/or compliance program with counsel are well advised to plan a review with counsel at this time. Discrepancies between operations and either disclosures or policies may become actionable violations, even if the statute or rules would not otherwise prohibit the adviser's conduct.

Comments or questions regarding this client alert may be directed to Alexandra (Sandra) Poe, partner in Reed Smith's Corporate & Transactional Advisory Group, and a leader of Reed Smith's private fund formation and counseling practice.

Access the 2015 Exam Priorities.


1.See, e.g., In the Matter of Clean Energy Capital, LLC and Scott A. Brittenham, Securities Act of 1933  Release No. 9667 (October 17, 2014) (fining Clean Energy Capital and its founder $2.25 million for allocating adviser overhead expenses to certain private equity funds and changing distribution calculations without adequate disclosure); In the Matter of Lincolnshire Management, Inc., Investment Advisers Act of 1940  Release No. 3927 (September 22, 2014) (fining Lincolnshire Management $2.3 million for sharing expenses between portfolio companies in a way that benefited one fund over another); Spreading Sunshine in Private Equity, remarks of Andrew J. Bowden, Director, Office of Compliance Inspections and Examinations, Private Equity International (PEI), Private Fund Compliance Forum 2014 (New York, N.Y., May 6, 2014).

2."Private Equity Not So Private as Fees Revealed at Blackstone," by Sabrina Willmer and Alan Katz, Bloomberg.com, January 1, 2015.

This article is presented for informational purposes only and is not intended to constitute legal advice.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.