SEC Issues Letter to New Investment Advisers Regarding Presence Exams

On October 9, 2012, the Office of Compliance Inspections and Examinations (OCIE) of the SEC issued a letter directed to senior officers of newly registered investment advisers that manage private equity funds introducing them to the National Exam Program (NEP). The letter explains that the NEP is launching an initiative to conduct Presence Exams, which are focused, risk-based examinations of investment advisers to private funds.  In the letter, the SEC explains that the Presence Exams initiative will take place over the next two years and will be comprised of three phases: engagement, examination and reporting. 

Engagement Phase.  The NEP is currently engaged in an outreach program to inform newly registered investment advisers about their obligations under the Advisers Act.  As part of such outreach, the NEP has published various materials, including staff letters, risk alerts, special studies and speeches.  The letter contains a list of some of these resources and their reference links. 

Examination Phase.  The letter states that the NEP staff will contact advisers separately if and when they are selected for an examination.  If an adviser is selected for examination, the NEP staff will review one or more of the following higher risk areas: marketing, portfolio management, conflicts of interest, safety of client assets and valuation.   Upon completion of an on-site examination, the NEP staff may send the investment adviser a letter (i) indicating that the exam has concluded without findings, or (ii) describing the deficiencies identified and asking the firm to take corrective action.  Serious deficiencies may be referred to the Division of Enforcement of the SEC or other regulators.

Reporting Phase.  Upon completion of the examination phase, the NEP will report its observations, such as common practices and industry trends, to the SEC and the public.

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