SEC Examinations

SEC Provides Details on RIA Examination Program and Process

September 13, 2023 | Charlie Jarrett

The SEC’s Division of Examinations recently released general guidance, in the form of a Risk Alert, for how the registered investment adviser examination program operates, how examination targets are selected, and how the scope of examinations is determined.

With over 15,000 investment advisers registered with the SEC, the SEC has developed a risk-based approach for determining what investment advisers are selected for examination and the depth of the subsequent exam. This risk-based process has allowed the SEC to examine approximately 15% of the registered investment adviser population over the last few years, even as the population of SEC registered has increased by 13% over the last three years.[1]

SEC Announces What to Expect for Newly Registered Investment Advisers

April 6, 2023 | Charlie Jarrett

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]

What to Expect: SEC Announces Examination Priorities for 2023

March 7, 2023 | Charlie Jarrett

The Securities and Exchange Commission (SEC) recently released the 2023 Examination Priorities from the Division of Examinations, formerly known as the Office of Compliance Inspections and Examinations. This annual release provides insight into the areas that the SEC plans to highlight when examining investment advisers during the coming year.

Over the last few years, the SEC has adopted several new rules that include compliance obligations. As the implementation dates for these new rules have passed, the SEC will prioritize examining how investment advisers have incorporate the rules into their compliance programs. While impacting a limited number of investment advisers, the amended rules include changes to the Derivates Rule and Fair Valuation Rule.[1] Continue reading ›

SEC Announces 2021 Examination Priorities

March 25, 2021 | Steve Parker

Earlier this month, the Securities and Exchange Commission announced the examination priorities for registered investment adviser and broker-dealer examinations to be conducted in 2021 by the SEC’s Division of Examinations (formerly the Office of Compliance Inspections and Examinations).

The list included a continued focus on conflicts of interest, including examining for compliance with Reg BI (for broker-dealers) and with an investment adviser’s fiduciary duty. Among the matters examined will be whether RIAs comply with care and loyalty duties that arise from the fiduciary duty. Whether firms have taken appropriate steps to mitigate, disclose or eliminate conflicts of interest will continue to be a focus, with an emphasis on whether customers received enough information to be the basis of informed consent. The Division will also continue to prioritize examining information regarding investment products that carry elevated risks, such as certain ETFs, municipal securities, private placements, variable annuities, and microcap securities.

Not surprisingly, the Division will also focus on two areas that were emphasized over the last two years to varying degrees: ESG-related risks and disclosures and proxy voting practices. RIAs who offer asset management based on ESG principles will be questioned regarding their representations regarding products or services provided, including representations regarding third-party managers or products. The Division will also examine to ensure that proxies have been voted consistent with customer’s desires to invest in ESG focused investments.

Business continuity and disaster recovery plans will be a focus this year, including whether lessons learned during the pandemic have appropriately informed changes to such plans. A greater emphasis will also be placed on climate-related risks, due to greater instances of climate hazards experienced in recent years attributable to climate change. These types of issues will be of heightened concern for examinations of critical market participants such as clearing firms and market makers.

Investment Adviser Touting COVID-19 Investments Sued By SEC

June 8, 2020 | Steve Parker

On June 3, 2020, the U.S. Securities and Exchange Commission filed suit against a company claiming to be an internet-only investment adviser, based on the firm’s failure to respond to a request for documents and information, in violation of the Investment Advisers Act and rules. The company, E*Hedge Securities, Inc., is registered as an investment adviser with the SEC. The complaint also alleges, however, that E*Hedge is not properly registered, as it is ineligible to claim the basis for registration of an “internet only” adviser under Rule 203A-2(e), and does not meet any other qualification for federal registration. E*Hedge’s President, Devon W. Parks, is also named as a defendant in the complaint.

The complaint alleges that in March 2020, E*Hedge began marketing investment opportunities relating to COVID-19 related products and services, particularly tests and treatments. The firm began operating a website at www.Covid19invest.com. It also used social media websites for the same purposes. Together the websites touted investments in companies involved in manufacturing vaccines, diagnostic tests, and treatments for COVID-19. E*Hedge’s website identifies the company’s primary business is to provide a platform for initial public offerings, offerings under Regulation A+, and private offerings under Rule 506 (c). Continue reading ›

Investor Losses from Oil Pricing War Could Trigger FINRA and SEC Exam Scrutiny

March 11, 2020 | Steve Parker

As the saying goes, “a rising tide lifts all boats.” This expression is commonly used in the investment world to mean that in bull markets, all portfolios tend to rise, no matter how poorly constructed. However, when the market changes directions sharply, as it has over the last thirteen trading days, poorly constructed portfolios sink more precipitously than the overall market.

The stock market has never before plunged by 18% off of its all-time high over such a short time frame. The main driver of the decline had been, prior to this week, concern over the impact that the spreading Coronavirus will have on the US economy. On Monday, March 9, however, news of an oil trade war caused a further, more precipitous decline. But the 18% decline in the market in the last few trading days represents the broad equity markets. Investors whose portfolios are overconcentrated in individual stocks or market sectors are experiencing even worse declines. To continue the boat metaphor, some portfolios will be sunk or will crash against the rocks. Continue reading ›

SEC Identifies Common Compliance Issues with Reg S-P Privacy Notices and Safeguarding Policies

April 30, 2019 | Patricia Klusmeyer

The SEC’s Office of Compliance Inspections and Examinations recently conducted examinations of privacy notices and safeguarding policies of SEC-registered investment advisers and broker-dealers adopted pursuant to Regulation S-P. As a result of these examinations, the SEC issued a Risk Alert identifying common deficiencies that are important to keep in mind when adopting, implementing and reviewing compliant privacy notices and effective safeguarding policies.

Regulation S-P requires financial institutions such as investment advisers and broker-dealers to adopt written policies and procedures to safeguard nonpublic personal client information. These policies must be reasonably designed to protect the confidentiality and security of nonpublic personal client information from any anticipated threats or hazards and any unauthorized access or use. The policies should address administrative, technical, and physical safeguards.

Investment advisers and broker-dealers must also provide initial and annual privacy notices to their clients describing the types of information collected and disclosed, the types of affiliated and non-affiliated third parties the information is disclosed to and, unless exempted from the opt-out notice requirement, an explanation of the client’s right to opt out of disclosure of nonpublic personal information to a non-affiliated third party. The privacy notice should also generally describe the firm’s safeguarding policies and procedures.