SEC Is Getting Into the Weeds

The SEC is getting into the weeds in these areas, asking questions that it hasn't in past years, many of them warranted. Specifically:

• Custody. If you say you don't have it, how do you know? Have you reviewed all of your accounts? Tested websites for which you maintain client passwords to confirm that possession of same does not rest in an adverse custody situation?

• Monitoring and due diligence. If you claim that you are providing initial and ongoing review and monitoring of separate account managers and private investments (and getting paid an AUM fee for same), show or substantiate the due diligence, supporting records and processes to corroborate your initial and ongoing review and justify your ongoing fee.

• Outside business activities. How do you monitor them? Do you have a policy? An outside business activity form that employees must complete initially upon employment and annually thereafter?

• Branch offices, remote employees and reps. How do you monitor them? Can you provide supporting documentation to substantiate such supervision?

• Valuations of private investment vehicles. If the underlying vehicles do not comprise exchange-listed securities that are marked to market (e.g., real estate, private equity and venture capital funds), how can you demonstrate to the commission that the value you are using to calculate your AUM fee is reasonable? Maintaining initial purchase price on an ongoing basis is generally not acceptable, especially without qualifying disclosure to the client, and even then it can be problematic.

• Solicitors. How do you vet them initially and monitor on an ongoing basis? Do they need to be registered? Is there a written process? This is especially critical for firms whose business model means they materially rely on outside (unaffiliated) solicitors for new business.

• Vendors. How do you vet and monitor those who have access to your offices or client information? Have they executed confidentiality agreements?