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Presence Exams

As part of its initiative to increase oversight of investment advisers pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”), the Securities and Exchange Commission (“SEC”) recently released a memorandum outlining increased scrutiny for newly registered advisers[1] through “Presence Exams.”[2]

Presence Exams are “focused, risk-based” reviews of newly registered advisers under the Investment Advisers Act of 1940. Though the SEC has not finalized the content, methodology, or length of Presence Exams, the SEC has indicated such exams will focus on traditionally “high risk” areas in investment advising, including conflicts of interest, marketing, valuation, portfolio management and asset security.

The Presence Exam initiative has three distinct phases: Engagement, Examination and Reporting. Each phase will generally conform to the following goals:

Engagement

  • Inform newly registered advisers about their obligations under applicable regulation.
  • Publish materials assisting advisers with compliance, including staff letters, risk alerts, no-action letters and special studies.
  • Focus on providing senior advisers with a forum to address compliance issues and learn about effective compliance practices.

Examination

  • Select advisers for review and examine one or more high-risk areas associated with fund management.
    • The SEC has not indicated how advisers will be selected, how the SEC will determine which high-risk area(s) to examine, how long the review will last, or when Presence Exams will begin.
    • Additionally, the SEC has not clarified when a newly registered adviser is no longer eligible for a Presence Exam.
  • At the end of each Presence Exam, send the applicable adviser a letter finding no deficiencies, highlighting deficiencies, or referring the adviser to the SEC’s Enforcement Division or another regulator if the Presence Exam uncovered serious deficiencies.

Reporting

  • The SEC will report its observations to the public, likely focusing on areas where new advisers consistently ran afoul of existing regulation.

Presence Exams represent an additional regulatory requirement that formerly exempt advisers must meet to stay in the SEC’s good graces. Although we are reluctant to draw specific conclusions without additional information from the SEC, one general theme seems true: The Presence Exam will be another manifestation of Dodd-Frank’s focus on having the SEC take a more active role in requiring presumptive evidence of propriety from advisers to private funds.

Additional general information about the SEC’s new compliance initiatives can be found at the Office of Compliance and Inspection’s information on the National Examination Program at http://www.sec.gov/about/offices/ocie.shtml.

Please feel free to contact us should you have any questions regarding Presence Exams or related compliance matters.



[1] Newly registered advisers are advisers that registered with the SEC after Dodd-Frank’s effective date: July 21, 2011.

[2] See the SEC General Letter introducing the Presence Exam (“General Letter”): http://www.sec.gov/about/offices/ocie/letter-presence-exams.pdf.