RIA Compliance Blog
The SEC’s Division of Examinations recently released their Observations from Examinations of Newly-Registered Advisers. Issued as a Risk Alert, the release provides guidance for what investment advisers new to SEC registration should expect, but also warns were previously examined advisers failed to meet the SEC’s expectations.
The SEC typically initiates an examination of new-to-SEC registration investment advisers within the first year of registration. In our experience, this can occur as soon as six months after the registration is approved. The purpose of these examinations is as much informative as it is about enforcing the securities regulations. In the SEC’s own words, “[s]uch examinations allow the staff to: provide advisers with information about the Division’s examination program, conduct preliminary risk assessments, facilitate discussions regarding the advisers’ operations and risk characteristics, and promote compliance with applicable statutes and regulations.”[1]
Like most SEC examinations, the examination of newly-registered advisers starts with a document request collecting records and information about the firm. The request focuses on the advisory business and investment activities, affiliations and arrangements, compliance policies and procedures, and the disclosures made to clients. In our experience, the record request only cover the time period when the adviser was first registered with the SEC. For these newly-registered advisers, this can be an extremely limited request compared to future examinations that may cover multiple years.
Once the SEC has reviewed the responsive documents, they typically conduct interviews with advisory personnel and compliance staff. In recent years, these interviews are conducted remotely, but these can, and have been conducted in person. Examinations are typically concluded in a series of deficiency letters that may or may not request additional documents or representations from the adviser how future operations will be conducted.
One of the main goals of these introductory examinations is to provide an initial assessment of the firm’s risk. This risk assessment is based on both the external involvement with clients and the financial markets, and the internal operations functions of the firm.
The SEC reviews organizational charts, information about advisory, compliance, and management personnel, financial information about the firm, and relationships or arrangements with affiliates and related parties. The examination additionally covers investment operations including the advisory services offered, the type of clients services, how clients are obtained, strategies employed, agreements with services providers, and the authority for the advisory operations.
When reviewing the firm’s compliance program, the SEC will look to the written policies and procedures and code of ethics to evaluate the firm’s internal controls. Additionally, the SEC will evaluate the firm’s ability to test the policies and procedures for compliance, as well as potentially reviewing the results of such testing.
The Risk Alert includes the SEC’s observations from their examination initiative of newly-registered advisers. The observations highlighted three areas where the SEC has found some newly-registered advisers are deficient: (1) compliance policies and procedures, (2) disclosure documents and filings, and (3) marketing.[2]
Relating to the compliance policies and procedures, the SEC found that some advisers’ policies and procedures did not adequately address the specific risks to the firm, did not contain procedures to implement certain policies, and in some instances were disregarded by advisory personnel. The Risk Alert specifically addresses observations including, the inability of off-the-shelf compliance manuals to adequately tailored controls to the firm’s operations, the failure to devote sufficient resources to compliance, undisclosed conflicts of interest, and the outsourcing of operations without the oversight expected of such service providers.
The SEC’s observations also included disclosure documents that were untimely filed and contained inaccurate information. Similarly, the observations related to marketing including marketing materials containing inaccurate or misleading information, as well as the advisers’ inability to substantiate claims contained in the marketing.
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds, and issuers of securities, among others. Our Investment Adviser Group assists financial service providers with complex issues that arise in the course of their business, including complying with federal and state laws and rules. Please visit our Investment Adviser Practice Group page for more information.
[1] Securities and Exchange Commission, Observations from Examinations of Newly-Registered Advisers (March, 27, 2023) https://www.sec.gov/files/risk-alert-newly-registered-ias-032723.pdf.
[2] Id.