Regulatory Roundup: 2014 Examination Priorities Presented by: Erika Subieta, J.D extension 216 National Compliance Services, Inc. Delray Beach, FL ©2014 National Compliance Services, Inc.

Discussion topics 2  The Industry  Enforcement Facts  SEC Initiatives and Priorities for 2014  Market-Wide Initiatives  RIAs: The Never-Before Examined Initiative  Emerging Areas of Regulatory Interest  The States – Enhanced Advisor Examinations  Top Exam Deficiencies

The Industry  The RIA industry in the past 10 years has grown by 8% with breakaway brokers accounting for much of the increase.  Over the past 5 years the number of broker dealers dropped by almost 15%.  The number of registered reps dropped by almost 35,000 individuals. 3

Enforcement Facts  The SEC filed 686 enforcement action cases in The 686 enforcement actions resulted in over 3.4 billion dollars in fines.  The SEC has a strong pipeline with over 900 investigations going forward into

SEC’s Initiatives and Priorities  Most Significant Market-Wide Priorities  Fraud Detection and Prevention  Corporate Governance, Enterprise Risk Management  Conflicts of Interest  Technology  Dual Registrants  New Laws and Regulations  Retirement Vehicles and Rollovers 5

SEC’s Initiatives and Priorities  The Never-Before Examined Initiative *  The Securities and Exchange Commission announced on Feb. 20 th, that its Office of Compliance Inspections and Examinations (OCIE) is launching an initiative directed at investment advisers that have never been examined, focusing on those that have been registered with the SEC for three or more years. OCIE previously announced that examining these advisers is a priority in *Excluded from this initiative, are newly registered advisers to private funds, which are being examined pursuant to the “Presence Exam” initiative launched in October

The Never-Before Examined Initiative  The NBE Initiative includes two distinct approaches:  Risk Assessment  Focused Reviews 7

 Focus Areas for Review:  Compliance Program  Filings/Disclosure  Marketing and Performance Advertising  Portfolio Management  Safety of Client Assets 8 The Never-Before Examined Initiative

Emerging Areas of Regulatory Interest  Other Exam Priorities and Emerging Issues:  Alternative Investments  Social Media  Wrap Fee Programs  Quantitative Trading Models 9

Emerging Areas of Regulatory Interest Alternative Investments  When recommending or placing client assets in Alternative Investments, it is important to perform sufficient initial and ongoing due diligence on AI managers and AI products in order to better understand and evaluate risks relating to the underlying investments, operations, liquidity, as well as legal implications and risks.  Due diligence practices should be effective in assisting the adviser in determining whether the investment(s):  Are consistent and suitable with the clients’ investment objectives.  Are consistent with the investment principles and strategies that were disclosed by the manager ( as set forth in various documents, such as advisory disclosure documents, private offering memoranda, prospectuses, term sheets or other offering materials provided by the manager).  Utilize proper controls and provide enough transparency to ensure safety of client assets. 10

Emerging Areas of Regulatory Interest Alternative Investments  On January 28 th the SEC issued a risk alert that describes certain industry trends, observations and deficiencies in the due diligence practices of investment advisers. Some of the noted deficiencies included:  Annual Reviews - Omitting alternative investment due diligence policies and procedures from their annual reviews, when selecting or recommending AI investments was a key portion of their business.  Marketing Claims - Providing potentially misleading information in marketing materials about the scope and depth of due diligence conducted.  Disclosures - Having due diligence practices that differed from those described in the advisers’ disclosures to clients. 11

Emerging Areas of Regulatory Interest Investment Adviser Use of Social Media  Firm’s use of social media must comply with various provisions of the federal securities laws, including, but not limited to, the antifraud provisions, compliance provisions, and recordkeeping provisions.  In a recent Risk Alert, OCIE commented that RIAs’ use of social media has been a matter of interest to the SEC.  They made several observations and comments in the risk alert regarding recently examined firms that utilize social media and how that practice was addressed in policies and procedures. 12

Emerging Areas of Regulatory Interest Investment Adviser Use of Social Media  Below is a non-exhaustive list of factors that RIAs may want to consider when evaluating the effectiveness of its compliance program with respect to firm, IAR, or solicitor use of social media: Usage Guidelines Content Standards Monitoring Frequency of Monitoring Approval of Content Firm Resources Criteria for Approving Participation Training Certification Functionality 13

Emerging Areas of Regulatory Interest Investment Adviser Use of Social Media  Factors (continued): Personal/Professional Sites Information Security Enterprise Wide Sites 14

The States – Enhanced Exams  The State’s have also expanded their exam activities.  Within the first 6 months of 2013, 1,130 examinations uncovered over 6,000 deficiencies in 20 compliance areas. Almost double the amount of deficiencies a year before. 15

The States Best Practices at a minimum should include:  Review Disclosure on Form ADV Part 1 vs Part 2 at least annually  Disclose any conflicts of interest  Intentional or unintentional custody of client assets  Disclose any soft dollar arrangements  Review and update client contracts  Prepare and distribute a privacy policy initially and annually  Review all advertisements including website for accuracy  Calculate and document fees correctly  Review WSPs at least annually and update as necessary  Review registration requirement for the firm, IARs or solicitors 16

Top Ten Exam Deficiencies  Failure to keep accurate books and records – 68%  Improper registration – 58%  Contracts - 44%  Privacy – 19%  Brochure delivery – 18%  Advertising – 18%  Fees – 18%  Supervision – 16%  Custody – 16%  Financials 13% 17

Presented by: Erika Subieta, J.D extension 216 National Compliance Services, Inc. Delray Beach, FL