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January 02, 2024 at 01:21 PM
Securities and Exchange Commission exams can be nerve-racking for RIAs, particularly given the more aggressive tone the SEC has adopted in recent years.
Nonetheless, they are an inevitability for those investment advisors registered with the SEC. It behooves RIAs to ensure they are prepared for such exams given the severe consequences that can arise for not being prepared.
As the saying goes, “Those who fail to prepare must be prepared to fail.” Adopting the following five best preparation practices does not guarantee that an advisor will go through an exam unscathed, but they will almost inevitably benefit the RIA.
1. Review Annual Exam Priorities and Other SEC Guidance
RIAs should ensure that they are familiar with recent guidance from the SEC regarding its priority focus areas for exams.
In recent years, the SEC has published a significant amount of formal and informal guidance on what topics they are most focused on when examining RIAs. Such guidance takes many forms, including the annual publication of the SEC examination priorities for the upcoming year, periodic risk alerts highlighting specific issues raising concerns as identified by the staff in recent examinations of investment advisors, and staff bulletins on specific compliance topics.
Although SEC exams are not uniform and can vary among branch offices and even individual exam teams, the above publications highlight the topics likely to garner the most scrutiny in exams. Therefore, RIAs should become familiar with such regulatory updates to ensure that their firms are properly addressing the highlighted issues and deficiencies.
2. Become Familiar With SEC Document and Information Requests
RIAs should become familiar with the types of information and documents that are being requested in recent SEC exams and ensure that advisors have all such information and documents and that they are readily accessible. By way of background, the SEC reviews an RIA by initially requesting significant volumes of information about the firm’s business and compliance program.
The SEC recently published a risk alert that included a document highlighting some of the typical information and documents the staff requests from investment advisers at the outset of an examination. Ideally, the SEC will continue to update this list as it evolves. Even if the SEC does not update it, advisors can reach out to firms that regularly guide advisors through the SEC exam process to understand what information and documents the SEC has been requesting in recent exams.
By understanding what documents the SEC staff is requesting, RIAs can review their compliance books and records and ensure that they have all such books and records. RIAs may want to create a folder in which such information and documents can be housed for easier retrieval in the event the SEC comes knocking.
