SEC sets examination priorities

2013 focus on private fund, dually-registered advisers, mutual fund payments

By Mark Schoeff Jr.

Feb 22, 2013 @ 12:43 pm (Updated 4:00 pm) EST

SEC, examinations, mutual funds, advisers

Investment advisers to private-equity and hedge funds, and those who are dually registered as broker-dealers, will be targeted by Securities and Exchange Commission examiners this year.

The SEC also will focus examinations on payments that advisers and funds make to companies that distribute the funds, and will explore the use of alternative and hedge funds in exchange-traded funds and variable annuities. The review priorities were posted on the SEC website yesterday.

For broker-dealers, among the areas the SEC will target are fraudulent sales practices used with retail investors and compliance with the agency's new market access rule.

Under the Dodd-Frank financial reform law, private-equity and hedge fund advisers must register with the SEC for the first time. About 2,000 private-fund advisers registered with the agency in 2012.

The SEC will conduct “presence exams” for the new registrants in an effort to better monitor systemic risk the funds might pose to the financial system.

The agency is putting an emphasis on reviewing investment advisers who are dually registered as brokers because of the convergence of the two practices. The agency is concerned that investors could be harmed as the lines between the two blur.

“For example, it is not uncommon for a financial professional to conduct brokerage business through a registered broker-dealer that she does not own or control and to conduct investment advisory business through a registered investment adviser that she owns and controls, but that is not overseen by the broker-dealer,” the document states. ”This business model presents multiple conflicts.”

The SEC also is keeping an eye on payments that advisers and fund companies make for fund distribution, a practice that is labeled in the report as “payments for distribution in guise.”

“The staff will assess whether such payments are made in compliance with regulations, including Investment Company Act Rule 12(b)-1, or whether they are instead payments for distribution and preferential treatment,” the document states.

The SEC is providing the guidance on examinations so that advisers are not caught by surprise.

“We are publishing these priorities to promote compliance and communicate with investors and our registrants about areas that we perceive to have heightened risk,” Carlo di Florio, director of the SEC's Office of Compliance Examinations and Inspections, said in a statement. “This document, as well as our Risk Alerts and other public statements, are windows through which we can increase transparency, strengthen compliance and inform the public and financial services industry about key risks that we are monitoring and examining.”

The SEC oversees about 11,000 investment advisers and 800 investment companies that together have about $50 trillion in assets under management. In conjunction with the Financial Industry Regulatory Authority Inc., the agency regulates about 4,600 broker-dealers with more than 630,000 registered representatives.