By Sarah Schmidt, Consultant

On September 6th, 2023, the Securities and Exchange Commission (SEC) issued a risk alert titled, “Investment Advisers: Assessing Risks, Scoping Examinations, and Requesting Documents.” This seven-page document delves into the thought process behind examinations. It also includes attachments containing the typical examination procedures and document requests made by the SEC staff to advisory firms.

The primary purpose of this risk alert is to serve as a guidance tool for investment advisors, aiding them in preparing for regulatory examinations. In the following sections, we will dissect the key components of the document to provide a more detailed understanding of what advisors need to be aware of.

Assessing Risks and Scoping Examinations

The SEC may opt to subject a firm to examination for various reasons, some of which include:

  1. Past examinations revealing recurring deficiencies.
  2. Significant issues related to fees and expenses.
  3. Concerns regarding the firm’s compliance program.
  4. A history of disciplinary actions involving individuals or affiliates.
  5. Complaints or tips reported to the SEC about the firm.
  6. Conflicts of interest, especially in cases where the firm is dually registered or affiliated with brokers.
  7. The time elapsed since the last examination.
  8. Significant changes within the firm, such as changes in the Chief Compliance Officer (CCO) or firm’s location.
  9. Financial or market stresses experienced by the advisor.
  10. Media coverage that directly impacts the firm.
  11. Use of data from specific third-party data services.
  12. The disclosure history of the firm.
  13. The extent to which the firm has access to client assets.

To proactively prepare for an examination, it is highly advisable for advisors to review the annual priorities communicated by the SEC. These priorities typically relate to various aspects of the advisor’s business, including products, services, operations, and practices. Advisors should assess which areas of their practice pose the greatest risk to their clients.

Documentation Commonly Requested

The SEC has provided an extensive list of commonly requested topics during examinations. These include details related to operations, organizational structures, disclosures, conflicts of interest, client account listings, and compliance practices outlined in the compliance manual. Furthermore, the SEC will scrutinize core areas such as custody, valuation, portfolio management, fees, and expenses, as well as brokerage and best execution practices. Upon identifying these aspects within the firm, the SEC is likely to request documentation related to each. A comprehensive table summarizing these requests is available in the risk alert document.

Overall, the examination process serves the purpose of enabling the SEC to gain a deep understanding of the advisor’s business operations, investment activities, identified risk areas within written policies and procedures, advisory trading practices, and compliance testing points.

Our Recommendations

To adequately prepare for an impending examination, we recommend that advisors review their firm and compliance programs as it relates to the categories mentioned above.

  1. Review Compliance Manual to ensure compliance with both current Firm practices and new rulemaking.
  2. Review Marketing Policies and Procedures and confirm they are in line with the New Marketing Rule,
  3. Evaluate any conflicts of interest and associated agreements.
  4. Ensure Annual Compliance Reviews are completed and documented accordingly.
  5. Confirm Form ADV is up to date with all material changes.
  6. Ensure appropriate disclosures are made in Form ADV for your current Firm practices.