The United States Securities and Exchange Commission's Division of Examinations Risk Alert: Observations from Examinations of Newly-Registered Advisers covers the regulator’s typical focus areas and common observations. The Alert warns newly-registered advisers to pay close attention to the firm’s compliance policies and procedures, disclosures and marketing practices – advice that well-established firms should be heeding as well.
According to the memo, the number of SEC-registered firms has increased by over 20% in the last five years. And these newly registered firms have a laundry list of rules and regulations that they must be ready to comply with. Read our Registered Investment Adviser Checklist for more details on the compliance policies and procedures that RIA firms must have in place.
“One of the ways the staff assesses advisers’ risks is by learning about their conflicts of interest and how these risks are mitigated and managed by the advisers through their compliance programs.”
–SEC Risk Alert: Observations from Examinations of Newly-Registered Advisers
The firm’s ability to identify and mitigate conflicts of interest is a key focus of the Division’s examinations of newly-registered advisers. The regulator is looking to confirm that firms have both identified and addressed conflicts of interest across the firm. Examiners are also looking to see that firms are providing complete and fair disclosures to customers so they can make informed choices and that the firm has established effective compliance programs.
The Division of Examinations prioritizes examining newly-registered advisers to assess the firm’s compliance and to determine if disclosures and policies and procedures are consistent with the firm's actual practices. To make that assessment, examinators will interview advisory personnel and request documentation regarding business and investment activities, organizational affiliations, compliance policies and procedures and client disclosures. Recent exams have identified consistent issues with firms’ compliance policies and procedures, disclosure documents and filings and marketing.
Record SEC Enforcement in 2022 Brings Steep Penalties for Misconduct
Compliance Policies and Procedures
Examiners noted compliance policies and procedures that did not adequately address key risk areas, insufficient procedures to enforce and evaluate firm policies and failure of advisory personnel to meet compliance requirements, often because staff were not aware of their compliance obligations or the policies or procedures were not consistent with firm operations. Examiners also found annual compliance reviews that did not evaluate the adequacy and effectiveness of firm policies and procedures. Concerns raised include:
- Using off-the-shelf compliance manuals not tailored to the specific needs of the firm
- Insufficient sufficient resources to comply with regulatory requirements policies and procedures, including limited time for the CCO to perform their compliance duties or failure to ensure compliance personnel understood actual business practices. Read about the risk of CCO Liability.
- Undisclosed and unmitigated employee conflicts of interest
- Lack of oversight of outsourced business functions. Learn more about third party compliance.
- Inadequate business continuity and succession planning
Examiners found issues with disclosures including documents with omissions or inaccurate information along with filings that were late or missing altogether. The omissions and inaccuracies were related to disclosures surrounding compensation, business and operations including affiliates, other relationships, number of clients, and assets under management, services offered to clients, investment strategies including the use of models, aggregate trading, account reviews, disciplinary information, websites and social media activity and conflicts of interest.
Read how MyComplianceOffice allows firms to stay on top of disclosure obligations with easily configurable workflows and forms.
Examiners found adviser marketing materials with false or misleading information, including inaccurate details about staff experience or credentials, third-party rankings and performance. Examiners also found that some advisers were unable to substantiate factual claims.
Technology demonsrates committment to compliance
The exam serves as a warning that firms should be paying attention to these areas. But the alert also notes that these exam results are an opportunity for early engagement with the regulator and a chance to strengthen compliance efforts and head off future enforcement actions.
Making the investment in compliance technology proves to regulators that your firm is taking compliance seriously and demonstrating the culture of compliance that regulators are looking for.
The right compliance technology provides a best-practice framework for implementing and managing a compliance program at your firm. Look for a system with the ability to easily customize functionality like forms and workflows so you can prove to regulators that your compliance program is bespoke to meet the needs of your firm and not just off-the-shelf.
Be ready for your next exam
When you have the right compliance technology in place, it's easy to pull the documentation that your examiner is looking for. And critically, firms can be well aware of potential issues long before regulators are on your doorstep because gaps and red flags are automatically identified as part of ongoing compliance processes.
Regulatory Expectations Demand the Latest SaaS Compliance Technology
Take what you need!
Looking to get compliance up and running, or ready to take your existing program to the next level? MyComplianceOffice offers firms large and small a flexible, scalable and easy-to-use platform to meet their compliance right now and down the road. Firms can implement the modules that they need for compliance today and easily expand to add additional users and solutions as needs expand over time. And with one login and one data source, compliance teams can rest assured that they are looking at an integrated picture of compliance across the organization with a single dashboard view.
Set up a demo to see how we help Registered Investment Advisers–both newly-registered and well-established–effectively and efficiently manage compliance across the firm.