George Canellos, the new New York SEC Regional director has not been shy in advising the investment adviser community about the changes that are being made on the examination front. There is little doubt that the Bernard Madoff $65 billion Ponzi scam, and more recently, an alleged $20 million insider trading scheme at hedge fund firm Galleon Group, among others, has made regulators turn their attention even closer to the alternative investment industry. It is hard not presuppose that that SEC is trying to build back its credibility.
First, budgets have increased. We have learned that the SEC is dedicating more resources to ensure that its examination staff is properly trained so that they can better understand the products that are now being offered to investors and improve their ability to assess financial and compliance risks. We can also expect to see staff members, including commissioners developing areas of specialization . Additionally, the SEC has been given more tools to better conduct and streamline investigations but putting technology, among other things, to work to go through tips and complaints in a more efficient manner.
Second, staff has been includes greater subpoena power. Beforehand, staff members would have to submit a detailed petition which had to go through entire agency scrutiny before it could be approved by all commissioners. In an effort not to discourage staff members from submitting these requests for loathe of going through a lengthy approval process, the process has been much more streamlined. In fact, the House of Representatives voted in December to pass H.R. 2873, a bill that would provide enhanced enforcement authority to the SEC and allow for subpoenas issued issued by or on behalf of any United States District to be served in any other Federal district, in any action or proceeding instituted by the SEC, thus effectively granting the SEC nationwide service of process.
Third, there have been structure changes in the enforcement division. The SEC has created five new specialized units : 1) Asset Management, 2) Structured and New Products, 3) Foreign Corrupt Practices, 4) Market Abuse and 5) Municipal Securities and Pension Plans. Additionally, the division has been reorganized to eliminate the role of branch chiefs, establish a managing executive and expand the Office of Market Intelligence.
Fourth, as some of you already know, there have been changes in the way that the has been conducting its routine exams. Based on our experience, and dialogue with other professionals, examinations are longer and the initial requests for information are followed by numerous additional requests. Further, the SEC appears to want the information requested sooner rather than later with shorter time allocated to respond to requests and requests for “real time” production of emails. Most importantly, the SEC is now looking to third-parties (e.g., prime brokers, administrators, investors) to confirm the existence of assets.
With all these changes going on, its more than fair to say that the SEC is not looking to play patty-cake.
How should you respond?
There is no better time than now to start critically evaluating your compliance infrastructure, remedy any gaps, cure violations, schedule your annual review, train your own staff on their respective obligations under the Compliance Manual (which should be completely customized to your business) and update your conflicts of interests/risk assessments reports, among a whole host of other things. If you do not have the time to focus your energies on compliance now, it is highly recommended that you reach out to professionals who can. Its no longer business as usual folks!
