Wednesday, November 25, 2009

SEC Inspector General Releases Report on Investment Adviser Examination

On November 19, 2009, the SEC Office of the Inspector General published its final report (the "Report") on the results of the review of the SEC's processes for selecting investment advisers and investment companies for examination. The Report follows an extensive investigative report published in August on the SEC's failure to uncover Bernard Madoff's "ponzi" scheme.

The Report contains 11 recommendations designed to strengthen the SEC's process for selecting investment advisers and investment companies for examination.

Among other things, the Report recommends that:

  • as part of its process for allocating a risk rating for an investment adviser, the Office of Compliance Inspections and Examinations (the "OCIE") review SEC databases for information about past filings, examinations, and investigations relating to the adviser;

  • the OCIE and the SEC Division of Enforcement develop a protocol for the sharing of all pertinent information gathered about an investment adviser

  • the OCIE adjust its risk ratings of investment advisers in light of pertinent information gathered by any SEC division or office for any purpose

  • the OCIE establish procedures for evaluating an adviser's Form ADV in light of negative information received about the adviser, document and investigate areas of concern, and determine whether a "cause" examination or other appropriate action concerning the adviser is required;

  • the OCIE assign progressively higher risk ratings to advisers with greater assets under management and larger numbers of clients; and

  • the OCIE recommend to the Office of the SEC Chairman that it institute new rules requiring that additional information be reported on Form ADV, including (i) performance data; (ii) the fund's service providers and information about such entities; (iii) information about a hedge fund's auditor and any changes in the auditor; and (iv) an auditor opinion of the advisory firm;

  • the SEC finalize its proposed rule titled "Amendments to Form ADV" [Release No. IA-2711; 34-57419], and consult with OCIE and the Division of Investment Management concerning possible additional information to be included in Part II of Form ADV and provisions to assist OCIE in analyzing information in Part II of Form ADV; and

  • the OCIE develop and adhere to policies and procedures for conducting third-party verifications of the existence of assets, custodian statements, and other relevant criteria.
The OCIE concurred with all 11 recommendations in the Report, while the Office of the SEC Chairman and the SEC Divisions of Enforcement and Investment Management also concurred with the partial recommendations that pertained to them.

The Report provides for a 45-day period for the provision of a written "action plan" designed to address the recommendations.