The document provides an overview of a webinar on the SEC's Never-Before-Examined Initiative. It discusses how the SEC will be examining approximately 25-40% of investment advisers that have been registered for over three years but have never been examined before. The SEC will use one of two approaches - risk assessments or focused reviews - to examine these advisers. The summary also outlines what advisers can expect from an SEC exam, including document requests, timing, onsite visits, and follow up requests. Firms are advised to proactively review their compliance programs and identify any issues in preparation.

1. May 9, 2014CORDIUM POWERPOINT MASTER 1

2. The webinar will begin shortly…
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3. Never-Before-Examined
Initiative
May 8, 2014
Presented By:
Amelia Stoj, Partner & VP, Cordium
Jillian Timmermans, Partner & VP, Cordium

4. Questions
4
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© Copyright APRIL 2, 2014

5. Agenda
o Regulatory Landscape
o OCIE National Exam Program
o Common Types of Exams
o Examinations by the Numbers
o The Never-Before-Examined Initiative
o Overview
o Approaches
o Areas of Review
o What to Expect from a SEC Exam
o Document Production
o Notice/Duration
o Onsite Visit
o After the Onsite
o What Can Your Firm Do Now?
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6. Regulatory Landscape
o As of February 2014:
o There were over 4,000 private fund advisers registered with the
SEC.
o Close to 40% of all RIAs manage one or more private funds.
o Of these 4,000 private fund advisers:
o Over 2,000 registered with the SEC since July 21, 2010, when
the President signed the Dodd-Frank Act into law.
o Of these private fund advisers, 352 (8%) are domiciled in a
foreign country.
o Most of these are domiciled in the United Kingdom.
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7. OCIE National Exam Program (“NEP”)
o Andrew J. Bowden - Director of the agency's Office of Compliance
Inspections and Examinations (“OCIE”)
o Mission
o Improve Industry Compliance
o Local and national outreach seminars, risk alerts, recruitment of
industry experts, etc.
o Identify and Prevent Fraud
o Focused, risk-based examinations of registered advisers,
specialized working groups, coordination across SEC offices and
Divisions of Risk, Strategy and Financial Innovation and
Enforcement
o Monitor Risk
o Specialized units (Office of Risk Analysis and Surveillance, Office of
Large Firm Monitoring and Quantitative Analytics Unit, etc.)
o Inform Policy
o Utilize results/findings to inform future rulemaking and provide
guidance to the industry
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8. OCIE National Exam Program (“NEP”)
o In her formal statement for a Congressional hearing on the SEC’s
proposed FY 2015 budget, SEC Chair Mary Jo White includes
“[b]olstering examination coverage for investment advisers” at the
top of her list of four “key and pressing” priorities
o "A top SEC priority under the FY 2015 request is to add 316
additional staff to the examination program in its Office of
Compliance Inspections and Examinations (OCIE). This would allow
the agency to examine more registered firms, particularly in the
investment management industry”
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9. Common Types of Exams
o Routine Exams
o May be based on the passage of time since last exam
o Presence Exams
o Risk-based, focused examinations of newly registered advisers
o Common areas of focus include: (a) marketing, (b) portfolio management, (c)
conflicts of interest, (d) safety of client assets, and (e) valuation procedures
o Usually average 3-6 months from announcement to resolution, ½ as long as
typical exam
o Onsite time is limited
o Industry Sweeps/Special Purpose Exams
o Focus on a narrow issue and seek to determine how the industry is handling
that issue
o Recent examples include firm use of social media and disaster recovery
preparedness
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10. Common Types of Exams
oCorrespondence Exams
o Certain regional offices have been asking firms to submit documents for
review (e.g., trade blotters, marketing materials)
o Review may determine whether the firm merits an onsite examination
oCause Exams
o May be based on a tip or investor complaint
o Typically unannounced
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11. Examinations by the Numbers
o RIA Exams
o FY 2012: The SEC was able to examine only about 8% of
registered investment advisers.
o As of April, 2013, over 40 percent of advisers (including
relatively recently registered advisers) have never been
examined.
o As of April, 2013, an estimated 20% of all advisers that have
been registered for more than three years have never been
examined.
o Focus throughout 2013 was on conducting Presence Exams.
o New Focus on Never-Before-Examined advisers!!
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12. The Never-Before-Examined Initiative
o SEC announced on February 20, 2014 that they will be
commencing their Never-Before-Examined Initiative
o Introductory Letter directed to senior officers at advisers that
have been registered for at least three years, have never
been examined, and are not subject to the Presence
Examination Initiative
o Two-year project
o Goal is to examine 25-40% of this Never-Before-Examined
population
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13. Two Different Approaches
o Risk-Assessments
o Involves a high-level review of an adviser’s business activities
o Will focus on adviser’s compliance program and any other
documents that will enable examiners to determine the
accuracy of representations in disclosure documents
o GOAL: Improved understanding
o Will likely include:
o Request for documents to help examiners determine the
adviser’s risk rating
o Would generally include policies and procedures, trading information
and a handful of other information
o May include interviews
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14. Two Different Approaches
o Focused Reviews
o “Comprehensive, risk-based” exams of one or more of the areas described as higher-
risk.
o Similar to the Presence Exam approach. The SEC noted that its new Never-Before-
Examined Initiative will bear similarities with OCIE’s recent Presence Exam Initiative.
o Areas of Review include
o Compliance Program: an evaluation of the program’s effectiveness will include
reviewing books and records to determine if the adviser has (i) adequately identified
conflicts of interest and compliance-related risks; (ii) adopted policies and procedures to
mitigate and manage these; and (iii) put in place a Chief Compliance Officer who has the
necessary degree of knowledge and competence to fill that role and empowered that
person to administer the program.
o Filings/Disclosure: this review will focus on whether the RIA has disclosed “all material
facts regarding conflicts or potential conflicts of interest,” covering all areas of the RIA’s
business, investment activities and conflicts of interest.
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15. Areas of Review (continued)
o Marketing: a review of marketing materials will assess whether the RIA has (i) has
presented its business and performance records without false or misleading
statements; (ii) made any untrue statements of material facts; (iii) omitted any
material facts; (iv) made any other misleading statements; or (v) engaged in any
manipulative, fraudulent or deceptive activities.
o Portfolio Management: a review of the RIA’s portfolio decision-making practices to
evaluate issues such as allocation of investment opportunities, and consistency
with disclosures to clients.
o Safety of Client Assets: a review of the RIA’s compliance with the Investment
Advisers Act of 1940 (“Advisers Act”) custody rule and other laws aimed at prevent
loss or theft of client assets.
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16. What to Expect from a SEC Exam
o How Does it Start?
o Notification – usually by phone/email
o Request Letter
o What Does Life of an Exam Look Like?
o Document Production – often on a rolling basis
o Timing/Duration
o Onsite Visit
o After the Onsite
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17. What am I Required to Produce?
o Document Production
o Usually 15 to 25 requests in the initial request (normal exam could be
from 40 to 50 requests in initial request)
o Examples of Information Requested:
o Org charts – including ownership % and list of affiliates
o List clients, type, AUM, name of custodian, type of strategy, types of fees (in EXCEL)
o List of private funds, number of investors, domicile, master/feeder, nature of lock-up,
amount of leverage, etc. (in EXCEL)
o QTRs and all other personal trading records (in EXCEL if you use software to track)
o Trade blotter/ ten most and least profitable trades
o List of JVs (this should include outside business activities of key employees)
o Written policies and procedures
o Violations of Policies
o Investor complaints
o Committee minutes (if any)
o ADV Part 2Bs, marketing materials, Pitchbooks, etc.
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18. What am I Required to Produce?
o Below is guidance on what to expect from a typical SEC examination, in
large part based on Cordium’s experience assisting numerous advisers
through recent Presence Exams
o Document Production
o Could be 5 to 10 additional requests (could be another 20 to 30 in a normal
exam)
o If you don’t understand something on a request list - call and ask
o Prepare a written response to each requested item
o If an Examiner asks for something orally – ask to get the request in writing
and formally respond to the request
o Should Consider:
o Attorney Client Privilege
o Freedom of Information Act
o Bates Stamping and other Logistics
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19. How Far Back Will They Look?
o Will they request information that pre-dates registration?
o YES!
o How should you respond to those inquiries?
o Rule of thumb – produce the documents
o Discuss with counsel if there are problem areas
o Key is to get the exam off on the right foot
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20. Notice and Duration
o How much notice are advisers given?
o Likely 4 to 7 days – but production may be rolling
o How long should advisers expect the exam to last?
o Onsite
o Typically 2 to 3 days
o Additional requests
o Our experience has been that additional requests have stretched
out months from last onsite day.
o Conclusion
o Exit interview – Be proactive with what you learn
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21. Onsite Visit & Follow-Up Requests
o Typical Exam onsite time ranges from 2-3 days
o Helpful Tips:
o Do not try to delay the visit
o Present your “story” to the SEC on day 1
o Prepare your partners and key people – the SEC will want to talk with
certain people (CCO, CFO, IR, Head Trader, etc.)
o Keep the office clean, file cabinets locked, no papers out
o Set up a room for the examiners
o Make yourself available
o Discuss potential issues with counsel/compliance consultants in advance!
o It’s ok to say “let me get back to you on that”
o Ask for it in writing if they have follow-up document requests
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22. Onsite Visit & Follow-Up Requests
o After the Onsite
o Exit Interview
o Clarify questions/correct any perceived inaccuracies during the
call
o Be proactive – if an issue is identified– work to remedy it ASAP
o Consider responding with the manner in which you have
corrected or are in the process of correcting any issues
identified
o A proactive written response to the Exit Interview may
affect the content/substance of your firm’s Deficiency
Letter
o Could be additional requests for information weeks after
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23. Onsite Visit & Follow-Up Requests
o Potential for Deficiency/”Findings” Letter
o Generally received within 120 days of the exam (although not
required)
o Generally have 30 days to respond
o Next examination will likely address issues raised by examiners – Need
to follow-through on corrections!
o Should include manner in which any deficiencies were corrected as
part of firm’s annual review
o Referral to Enforcement
o If an exam reveals serious deficiencies, the SEC staff may refer the
problems to the SEC’s Division of Enforcement, state regulatory
agency, or other regulator for possible action
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24. What can Your Firm do Now?
o Things to Start Doing NOW:
o Create a “First Day” presentation
o Proactively identify conflicts
o Proactively identify gaps and possible problems
o Critically Review Compliance Manual – are policies in line with practices?
o Review Marketing Materials
o Test P&P throughout the year
o Beef up Annual Reviews – SEC is concerned that firms may only be doing
cursory annual reviews of policies and procedures
o Consider conducting Audit Prep or Mock Audit exercise
o Conduct periodic trainings
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25. What is Cordium seeing?
o As a firm we have recently supported over 25 of audits. Below are a
few real life examples of issues that have appeared in request
letters and/deficiency letters:
o Marketing Deficiencies – exact adherence to the manual
o Expense Allocation – what is being charged to the funds
o Focus on Insider Trading – Expert Networks and Research
o Adherence to fund documents – monitoring investment and risk parameters
o SEC continues to ask for emails to be produced – as such email review is an
important part of being prepared for an SEC exam
o Recent Cyber Security Sweep – request letter has been circulated
o Review the letter
o Reach out to admin and IT personnel to confirm adequate policies and procedures are in
place
o Revise policies as needed
o Implement a testing protocol if there is not one already
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26. Questions?
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27. Presenter Biographies
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Jillian Timmermans, Partner | Vice President
Jillian is Co-Manager of Cordium US’s Compliance Consulting Team and a Partner at the firm. In addition to
supporting clients with meeting their regulatory needs, Jillian assists in overseeing the consulting
department, which includes resource management, training, and product development. Jillian has worked
as an analyst in the Public Finance Department at Bear Stearns where she focused on fixed-income
issuance for city and state housing agencies. Jillian received a B.S., magna cum laude, in Applied Economics
and Management from Cornell University and a JD, magna cum laude, from New York Law School. Jillian is
also certified as an Investment Adviser Certified Compliance Professional (IACCP) by National Regulatory
Service's Center for Compliance Professionals.
Amelia Stoj, Partner | Vice President
Amelia is a Vice President of Cordium’s compliance consulting division and a Partner of the firm. She
currently runs the San Francisco office. Amelia helps investment managers successfully implement and
maintain a comprehensive compliance program. Her clients utilize a broad range of investment strategies
including but not limited to private equity, venture capital, real-estate related and fund of fund strategies.
Prior to Amelia joining Cordium as a compliance associate in 2010, she was an associate in the Private
Investment Fund practice group at Proskauer Rose LLP. While at Proskauer she represented general partners
and limited partners of private equity funds in connection with the structuring, formation, offering and on-
going operations of a variety of domestic and offshore private equity funds. Amelia received a J.D., with
honors, from the University of Connecticut School of Law in 2008 and a B.A. from Wesleyan University in
2002. Amelia is certified as an Investment Adviser Certified Compliance Professional (IACCP) by National
Regulatory Service’s Center for Compliance Professionals.