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News August 14, 2017 Issue

SEC Conducting Unannounced Examinations

At least one of the SEC’s regional offices is conducting unannounced examinations on investment advisers – and other SEC offices may notice and follow suit.

"We are doing unannounced exams," said the agency’s Boston Regional Office associate director for examinations Kevin Kelcourse. While he said he cannot speak for other regional offices, "we are certainly doing them here."

"SEC exam staff have been conducting unannounced exam visits to registered investment advisers in the Boston region and they could do this in other regions," said Kirkland & Ellis partner and former SEC Division of Investment Management director Norm Champ. "These visits emphasize again the importance of exam preparation for any registered investment adviser."

Less than 20 unannounced exams have been performed since the regional office resumed doing them "in the last year or so," Kelcourse said, adding that he may have the time frame wrong. He became associate director in the Boston office in November 2014, moving over from the Division of Enforcement.

"There is anecdotal evidence to support the contention that some firms are cleaning up a bit after we announce exams but before we arrive," Kelcourse said in explaining why the regional office chose to revive the unannounced exam visits. Some advisory firms, he said, may have the philosophy of "I’ll obey the speed limit when I see there’s a cop there."

That said, Kelcourse added that advisers "should not read anything into the fact that we are doing these exams." No particular type of advisory firm is targeted, he said. There had been some reports from securities attorneys in the area that private firms were the focus of these unannounced visits, but he said that was not the case. Private advisers, retail advisers and others may be selected.

Just how are the advisory firms selected? "I don’t want to go into the selection process," Kelcourse said, but added that those chosen for unannounced visits account for a very small percentage of all the advisory firms in the Boston region that are examined. "It’s just one tool in our toolbox."

"The unannounced visits are always done in conjunction with an open examination," he said. Typically, when examiners make these visits, they ask to meet with the chief compliance officer and, at that meeting, hand him or her a document request list. "We are not generally expecting that the firm will give us documents right then and there, but we may ask to see documents such as the ledger at that meeting."

History

Unannounced or "surprise" examinations have not been performed by the agency in many years. The typical routine in current years is for an adviser to receive a letter from the SEC a few weeks prior to the exam visit. That letter not only lets the advisory firm know of a pending visit, but usually requests specific documents that examiners want to review.

Surprise examination visits in recent years might occur for "cause," that is, if the agency believes it has good reason that some sort of malfeasance or other significant problem is occurring at a firm, and quickly makes plans to visit without an announcement.

Otherwise, however, surprise exam visits were a relic from the past – until now, that is.

Observations

Two securities attorneys in the Boston area both said they had heard that about six private fund advisers had been visited to date.

Sidley Austin counsel Kara Brown said that she first learned of unannounced exam visits in mid-July, and that the information was "just swirling around the Boston community. It’s causing some anxiety for advisers, particularly since it’s the summer and some employees are on vacation."

"My understanding is that the SEC examiners show up in the lobby area of an advisory firm and ask to speak with the chief compliance officer," she said. "Once in a meeting room with the CCO, the examiners ask for information about the firm’s compliance program, presumably to see where the adviser sits on OCIE’s risk spectrum."

Morgan Lewis consultant attorney Steven Hansen said that he was aware of six advisers, managing either hedge funds or private equity funds that were visited in a one-week period in June. He had the impression that most of them were never-before-examined firms, a group that OCIE has focused on previously. Some of the examiners, he said, "were members of the private fund unit not based in Boston."

Kelcourse said that during the Compliance Outreach (formerly CCO Outreach) program in Boston on June 13, he and his staff were "quite open" about the fact they were now doing unannounced exams.