• Jane Jarcho, National Associate Director of the IA/IC Exam Program at OCIE

• Michelle Jacko, Managing Partner, Jacko Law Group and CEO of Core Compliance & Legal Services in San Diego

• Tanya Kerrigan, General Counsel/CCO, Boston Advisors

• Brian Moran, CCO, Sterling Capital Management in Charlotte, N.C

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Jane Jarcho

National Associate Director of the IA/IC Exam Program at OCIE

Jane Jarcho

2015 OCIE Exam Priorities

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What is Happening in Examinations 2015 OCIE Priorities

Matters of Importance to Retail Investors and Investors Saving for Retirement

Assessing Issues Related to Market-Wide Risks

Data Analytics and Applying Risk Ratings to Entities

What the SEC is ExaminingTechnology – Cybersecurity Controls for BDs, IAs and Transfer Agents and Resources to Support Compliance

Investment Recommendations and Related Marketing, Suitability and Fee Structures

Newly Registered Municipal AdvisorsNever-Before-Examined Investment CompaniesProxy Services

Includes how proxy advisory service firms are making recommendations and disclosing conflicts of interest as well as the adviser’s fiduciary duty to vote such proxies

Fees and Expenses in Private Equity Transfer Agents

Includes an exam of those involved with microcap securities and private offerings

Other Examination Initiatives

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Michelle Jacko Managing Partner, Jacko Law Group and CEO of Core Compliance & Legal Services in San Diego

Current SEC Examination Focus AreasPortfolio Management

Trading Practices

Conflicts of Interest

Client Disclosures

Compliance Programs

Performance Calculations & Advertising Issues

Custody

Valuation

Business Continuity / Disaster Recovery

Cybersecurity8

Hot Topic Example #1: Performance Calculations & Advertising

Anti-Fraud Provisions: It is illegal to make a misstatement or omission of a material fact in connection with an offering of securitiesFirms should have policies and procedures in place to verify the accuracy of the performance and marketing information provided to solicit new clients

Recent deficiencies include: Unsupported claimsUse of superlativesInadequacy of risk and conflict disclosuresInaccurate performance reporting

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How to Prepare and Manage the Examination

Identify Securities Regulations that Govern the Firm’s Practice AreasReview and Update Firm Policies and Procedures

Have you identified risks and conflictsAre your protocols clearWho is the supervisor and do they understand their roles and responsibilitiesQuestion adequacy of each policy and procedurePerform tests to determine effectiveness

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How to Prepare and Manage the Examination

Gather Compliance Program DocumentationRisk Assessment and Annual Review Reports

Evidence of Testing and Exception Reports

Training Program for Associated Persons

Substantiation of a Customized Compliance System

Assess Overall Effectiveness“Not all compliance failures result in fraud, but many

frauds take root in compliance deficiencies.”-Robert Khuzami, Former Director of the SEC Division of

Enforcement

Priorities for AdvisersReview new services and business lines carefully; identify potential conflicts of interests and risks, and mitigate where possibleConsider internal controls, suitability for clients, compensation arrangements, effective disclosures and use of technologyStay apprised of new regulations and how they may impact your business Be aware of how the firm and its services are being promoted to prospective and existing clients

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Tanya Kerrigan

General Counsel/CCO

Boston Advisors

Tanya KerriganCase Study: Recent Examination of Boston Advisors, LLC

under the

Never Before Examined Initiative

I.Notification, Initial Response, Onsite Exam Process

II.Items Requested

III.Scope of Review

IV.Importance of Preparation• PowerPoint Presentation Prepared for SEC• Risk Assessment• Annual Review Documentation• Mock SEC Audit • Format of Trade Blotter and Client List

Tanya Kerrigan

I. Notification, Initial Response, Onsite Examination Process

• Received exam request on December 17, 2014 and were notified via telephone that the SEC wanted to be onsite on January 3, 2015.

• Request contained 22 items and turnaround for response was fast. Specifically: Trade Blotter, Policies and Procedures Manual, Annual Testing and Risk Assessment were requested for immediate delivery immediately, if possible. All documentation was sent to SEC within 4 days.

• Onsite Commenced January 3, 2015 - 4 examiners were present for 4 days. Written and Verbal requests were received sporadically over the next 2 months.

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Tanya KerriganII. Items RequestedA. Typical Items you would expect were requested: • Policies and Procedures and Risk Assessment • List of clients and employees lost during Exam Period • Company Balance Sheet, trial balance, income statement, general ledger detail

and statement of cash flows• List of all principal and cross transactions that took place during Exam Period• 206(4)(7) Annual Review • List of all threatened, pending the settled litigation/arbitration• List of approved broker dealers used• List of all IPO’s invested in for clients/firm• Evidence of Best Execution testing• Evidence of Compliance testing• List of all parties that received referral payments

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Tanya Kerrigan

II. Items Requested (continued)B. Items we found surprising

• Format of the Trade BlotterTrade blotter request included 27 required fields which was not standard for

Advent Moxy and required coding work to comply with request

• Format of the Client Request List Client List included 13 required fields and required patching of several different

reports together to satisfy request.

• Portfolio Starting Positions (a list of all initial holdings positions as of December 17, 2014

• All service agreements for compliance consultants utilized

• There were no request for emails or marketing, initially

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Tanya Kerrigan

III. Scope of Review

While we were often reminded that the NBE initiative is a “limited scope” engagement, once the review as begun, the examiners requested information that potentially went beyond a “limited scope” engagement.

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Tanya Kerrigan

IV. Importance of PreparationThe most valuable items that we produced which

shortened the duration and scope of the exam were:

• A PowerPoint presentation created in advance for the SEC that summarized the firm.

• A detailed risk assessment• A detailed 206(4)(7) Annual Review

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Brian Moran

CCO, Sterling Capital Management

in Charlotte, N.C

Brian MoranSpecific Investment Adviser Examination Request Items:

•A list of all committees including a description of each committee's responsibilities, meeting frequency, and a list of the members of each committee. State whether the committees keep written minutes.

•The names and location of all affiliated and unaffiliated key service providers and the services they perform.

•Compliance and operational policies and procedures in effect during the Examination Period for the Adviser and its affiliates. Please be sure to also include any Code of Ethics, insider trading, fair valuation, remote office monitoring, contractor oversight, and GIPS policies and procedures that are created and maintained.

 

Brian MoranSpecific Investment Adviser Examination Request Items:

•Any written interim or annual compliance reviews, internal control analyses, and forensic or transactional tests performed. Include any significant findings, both positive and negative, and any information about corrective or remedial actions taken regarding these findings.

•A current inventory of the Adviser's compliance risks that forms the basis for its policies and procedures. Note any changes made to the inventory during the Examination Period and the dates of the changes.

Brian MoranSpecific Investment Adviser Examination Request Items:

•A record of any non-compliance with the Adviser's compliance policies and procedures and of any action taken as a result of such non-compliance.

•Names of all pricing services, quotation services, valuation appraisers, and externally acquired portfolio accounting systems used in the valuation process. Also, please provide engagement agreements executed with these providers.

•Please provide a summary of the valuation process used during the Examination Period by security type (e.g., RMBS, CMBS, etc.) in terms of the data and models used, analysis performed, and output of the analysis. If indicative bid pricing is used, please indicate how indicative bids are obtained.

Brian MoranSpecific Investment Company Examination Request Items:

•The annual reports submitted to the RICs respective Boards of Directors/Trustees (the

"Board") by the Chief Compliance Officer ("CCO") during the exam period.

 

•Policy and procedures regarding disclosing, quantifying, and testing liquidity management related risks.

 

•Minutes of RICs' Board meetings for the Inspection Period, meeting agenda for each meeting and, the agenda and a draft of the minutes for the most recent Board meeting(s).

 

•Any internal reports created and maintained that reflect the amount of exposure to illiquid assets.

 

Brian MoranSpecific Investment Company Examination Request Items:

 •Any reports or letters submitted by the independent auditors to management and/or the audit committee during the Inspection Period.

 •Documentation created and/or maintained (e.g., compliance checklists and exception reports) demonstrating the review of each fund's compliance with investment restrictions (e.g., diversification, sector allocations, international exposure, etc.).

 

•Any reports to the funds' Board and/or investment advisers concerning compliance with other federal securities laws for the Inspection Period. Please include any reports of instances where the funds were "out of compliance."

Brian MoranSpecific Investment Company Examination Request Items:

 •Documents supporting the assessment of the RICs' liquidity and its ability to meet potential redemptions over a number of periods. The assessments may include, for example, needs and sources of fund liquidity over 1 day, 5 days, 30 days, and potentially longer periods.

 •A list of securities for which the price provided by a pricing service was overridden by the Adviser or Board of Directors and the date of the override.

Summation:

Examinations are becoming more pointed due to risk assessments to create efficiency but be aware that deeper dives are happening in controls around the operations of fund groups and investment advisers especially with focus on third party providers.

 

• Jane Jarcho, National Associate Director of the IA/IC Exam Program at OCIE

• Michelle Jacko, Managing Partner, Jacko Law Group and CEO of Core Compliance & Legal Services in San Diego

• Tanya Kerrigan, General Counsel/CCO, Boston Advisors

• Brian Moran, CCO, Sterling Capital Management in Charlotte, N.C