By: Jackie Hallihan

This year’s NSCP National Conference opened with an unfiltered conversation featuring former regulators offering firsthand, behind-the-scenes experience and perspective from inside the regulatory framework, including observations regarding shifts in priorities and current focus of examination and enforcement priorities. The discussion was moderated by Pete Driscoll, Partner at PwC and former Director of the SEC’s Division of Examinations, who set the tone with this observation:

“SEC Chairs rarely make lasting changes — but a new rule adoption can last for decades.” Changing existing rules is a long process, requiring re-proposal, comment, and re-adoption. As a result, adopted rules tend to be among the most durable and influential components of regulatory oversight.

Conference Highlights

Current Shift in Examination Priorities

The SEC’s exam priorities are no longer focusing on ESG or off-channel communications.  Instead, EXAMS is looking across the regions and centering on risk topics, such as:

• Valuation, fees and expenses
• A deep focus on conflicts
• Fraud
• Custody (a more targeted approach)
• Insider trading
• Retail investor protection
• Misrepresentation, accuracy in disclosures
• Marketing    

Key Exam Preparation Practices 

What can advisers do? The actual exam is the “test.” The SEC historically conducts approximately 3000 exams annually, and preparedness is critical to make a meaningful difference in exam outcomes. Key preparation practices include:

• The foundational principle is identifying the firm’s risks and conflicts.  Every advisory relationship involves potential conflicts; the question is whether they are identified, disclosed, and managed.  One thing for sure:  never say you have no conflicts!    
• Training and educating employees on the exam process. Conduct mock interviews so employees can respond clearly and consistently.
• Prepare a “first-day” exam presentation, summarizing your advisory business, risks, controls and compliance program.
• Ensure policies and procedures accurately reflect the firm’s practices.
• Address issues in real time when possible—if examiners identify a concern, remediate during the exam rather than waiting for the deficiency letter.
• Cooperate with examiners where possible; cooperation goes a long way. 
• If the Code of Ethics or compliance program policies and procedures require a violation log, examiners will expect to see it — complete and up to date.
• If the firm’s policies indicate that committee minutes are maintained, such as Compliance Committee minutes, those must be maintained, produced, accurate, and consistent with practice.
• Examiners typically review all noted compliance exceptions over the prior two years. 

How do the exam and enforcement staff handle the shift in priorities?  They are looking at the issues carefully and have learned how to phrase them within the framework of the new focus.  

Chris Mulligan, Partner at Weil, Gotshal & Manges, and formerly with the SEC Division of Investment Management, known for penning the Risk Alerts and rules, emphasized a continued enforcement focus on fees and expenses, a deep focus on conflicts, custody, misrepresentation and accuracy in disclosures and marketing.    

Judge Margaret Ryan, current Director of the SEC’s Division of Enforcement, who has only been in the role for one month, does not have a typical background for the role.  She is a senior judge of the U.S. Court of Appeals for the Armed Forces and served in the U.S. Marine Corps. She is known to ask “why,” and push for change as she implements SEC Chair Paul Atkins’ priorities.

SEC’s Use of AI Technology

On the subject of AI, the SEC has been using Palantir AI since 2017, an AI tool which helps organizations manage large complex datasets from various sources to make informed decisions.

CCO Liability 

Addressing CCO liability, enforcement actions targeting Chief Compliance Officers remain reserved for “egregious” fact patterns, such as obstruction, intentional misrepresentation and involvement in the violation.