Overlay Logo

New SEC Risk Alert “Observations from Examinations of Newly-Registered Advisers”

Gary Fox
Gary Fox
Regional Director

On March 27th, the Securities and Exchange Commission (SEC) published a Risk Alert entitled “Observations from Examinations of Newly-Registered Advisers”.

The examination program is based on the fact that the SEC recognizes that investment advisers that have recently registered “may face unique compliance risks and issues.” We have experienced that the Division of Examinations, in practice, will typically examine new RIAs within the first 2 years of their effective date of registration, though please note that this is an approximation. The Staff has stated their benchmark is “a reasonable period of time” and we have noted that some firms may be examined much earlier or later than that two year estimate.

This Risk Alert covers the areas reviewed during examinations of newly registered advisers and shares staff observations regarding compliance policies and procedures, disclosures, and marketing practices.

According to the Staff, the most common deficiency areas were:

  • Compliance Policies and Procedures
    • In general, the issues ranged from lack of detail to missing procedures entirely, as well as firms not following the procedures they did have in place either due to a lack of resources or simple communication failures
  • Disclosure Documents and Filings
    • Overall, the Staff stated they “observed required disclosure documents that contained omissions or inaccurate information and untimely filings”
  • Marketing
    • In this case the Staff expressed concerns about “adviser marketing materials that appeared to contain false or misleading information, including inaccurate information about advisory personnel professional experience or credentials, third-party rankings, and performance. Advisers were also unable to substantiate certain factual claims.”

In the release, the SEC described the following general requests it makes of firms during an examination, including:

  • General information to provide the staff with an understanding of the adviser’s business and operations
    • Examples include organizational charts; documentation to support eligibility for SEC registration; information about ownership and control of the adviser and its affiliates; and financial information, including the balance sheet, trial balance, and income statement
  • Demographic and other specific data regarding each advisory client account
    • Examples include advisory services provided and types of client accounts serviced
  • Information regarding the adviser’s compliance program, risk management practices and framework, and internal controls
    • Examples include written compliance policies and procedures, and the adviser’s code of ethics
  • Information to facilitate the staff testing for regulatory compliance in certain areas, including portfolio management and trading activities
    • Examples include records of specific information for all advisory clients’ securities holdings and transactions
  • Communication used by the adviser to inform or solicit new and existing clients
    • Examples include disclosure documents and advertising, such as pamphlets, social media, mass mailings, websites, and blogs

As always, these releases can be used to provide guidance and, more importantly, a starting point for creating a checklist for reviews that can be conducted internally.

You can read the full SEC release here.

DFP Partners Regulatory Services team conducts Annual Reviews for our Investment Adviser clients. To learn more about these and other services, please contact us here.

More from the blog