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Preparing for your next SEC exam | 3 tips and 6 hot topics

November 18, 2011

Under a magnifying glassSEC examinations are getting tougher every year – and any materials deficiencies the examiners uncover are increasingly likely to be the subject of an enforcement action – so you’ll want to be prepared for the SEC’s next visit. Panelists from Ernst & Young, K&L Gates, Matthews International Capital Management and the Securities and Exchange Commission — speaking at NICSA’s West Coast Regional Meeting this week — had these tips on how to get your firm ready:

  • Take a step back and evaluate your overall compliance effort. The SEC’s assessment of your compliance culture is now a key part of the exam. Make sure that your annual compliance review is robust – and that you’re ready to answer probing questions about your policies and procedures. Don’t miss the obvious: you’ll want to confirm that you’re complying with things like the terms of any exemptive orders.
  • Be prepared for a broad range of interviews. Examiners will ask to speak with senior executives, and they’re likely to ask to meet with your auditors as well. They may even request interviews with independent directors, especially if they’re concerned about management’s attention to key issues.
  • Expect an intensive review of new initiatives. Compliance problems are often a result of inexperience, so the SEC is paying close attention to new entrants. If you’re starting up a new product line or entering a new distribution channel, take the time to identify needed controls before you start accepting client money.

You’ll also want to pay attention to the SEC’s current list of hot topics. Here are some questions you should ask yourself:

  1. Administrated sponsored funds. Do you have a robust process for overseeing subadvisors?
  2. Fee setting. Is the board getting and reviewing the information it needs to evaluate the level of fees in the 15(c) review process?
  3. Valuation. Have you documented reasons for any deviations from policies or procedures? How are you handling corrections of NAV errors?
  4. Insider trading. Have you identified potential sources of material nonpublic information and established controls around them?
  5. 12b-1 fees. Are all parties receiving 12b-1 fees authorized to receive them, and are they providing the services they’re being paid for?
  6. Affiliated and cross transactions. Does the board have a robust review process for these transactions? Is the board receiving adequate information about them?

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