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SEC Accelerates Examination of Newly-Registered Investment Funds


On February 20, 2014, the SEC's Office of Compliance Inspections and Examinations struck fear into the heart of many newly-registered investment funds by announcing a new initiative to ramp up examinations of funds never previously inspected. The cute name of the program: the "Never-Before-Examined Initiative." The link to the SEC's release is here. The SEC's release is being sent to all registered investment advisers who have not previously been examined.

For the most part, the SEC's release repeats areas of focus well-known to investment funds who have been examined in the past. An ordinary inspection by the OCIE staff will include the following:

  • Review of materials to determine if the adviser's compliance program is effective. This includes hiring and empowering a Chief Compliance Officer to administer the program.
  • Review of books and records focusing on identification of conflicts of interest and other similar risks, disclosure of material facts concerning conflicts, and actions by the adviser to adopt policies and procedures that properly mitigate and manage those conflicts and risks.
  • Review of disclosures concerning the adviser's business, investment activities, and investment performance. Marketing materials will particularly be scrutinized to ensure disclosure of material facts (and that the adviser has not omitted material facts).
  • Review of the adviser's portfolio decision-making practices, particularly including allocation of investment opportunities.
  • Review of procedures for those advisers who have custody of client assets. (Note that "custody" has a far broader meaning in the investment fund world than what a plain meaning of the term might imply.)

We continue to counsel advance preparation for your first inspection. Compliance firms, law firms and others are well-situated to do a "dry run" for the data that the SEC will collect and analyze. Consider whether any such advance work can and should properly be protected from ordinary disclosure. 

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