SEC Risk Alert: Observations from Examinations of Newly-Registered Advisers

  

SEC Risk Alert: Observations from Examinations of Newly-Registered Advisers

On March 27, 2023 the Securities and Exchange Commission’s Division of Examinations (the Division) released a Risk Alert regarding its observations from newly-registered adviser’s introductory examinations. Since 2013, the Division has prioritized exams for newly-registered advisers within a reasonable period of time (generally within the first two years) after SEC registration. These exams give the Division an opportunity for early engagement to provide advisers with the following:

• Provide the Adviser information regarding the Division’s examination program.
• Conduct preliminary risk assessments in order to understand the Adviser’s operations and risk characteristics.
• Determine whether conflicts of interest have been adequately identified, addressed, and disclosed in a full and fair capacity for client consent.
• Promote compliance with applicable regulation, such as the Advisers Act, and through effective compliance programs.

The examination itself generally involves documentation requests for a defined time period and interviews with Adviser staff to determine the tone of compliance culture. Requests generally consist of the following items:

General Information – Organizational charts, eligibility for SEC registration documentation, ownership/control documentation, information regarding current and former personnel, financial statements, and any past, present, or potential litigation or arbitration cases. 

Demographics and Data – Adviser’s offered services, types of clients serviced and whether the Adviser maintains discretionary or non-discretionary authority, a current client list with their applicable holdings/transactions, what personnel services and oversees accounts, AUM data, third-party service providers, and investment strategies. Part of this request may require documents such as contracts, agreements, statements, etc.

Compliance Program and Risk Management – Compliance program documents such as the Adviser’s compliance policies and procedures, internal controls, code of ethics, and business continuity plan.

Communications –Advertising or marketing pieces used to inform or solicit new and existing clients such as brochures, social media, websites, blogs, or mailings.

Throughout the Division’s examination process, they have observed some consistent deficiencies brought forward through the alert:

Compliance Policies and Procedures – Programs were missing applicable risk areas, policies existed without controls or procedures to achieve them, lack of enforcement of policies and procedures, annual testing that did not prove effectiveness of implementation, purchased policies and procedures that were not further tailored to the Adviser’s operations and business , insufficient resources dedicated to compliance, outsourced services not properly understood or supervised, undisclosed and therefore unmitigated conflicts of interest, and inadequate business continuity plans, including succession plans.

Disclosure Documents and Filings – Disclosure documents contained omissions or inaccuracies relating to fees and compensation, business and operations, services, disciplinary information, conflicts of interest, and web/social media presence. Required updates such as material changes, or annual filings, were also noted as either being untimely or not completed.

Marketing – Advisers could not substantiate claims in their marketing material, or material appeared to contain false and misleading information, especially concerning advisory personnel’s professional experience, third party rankings/awards, and performance.

The Division will continue to make initial exams a priority for newly-registered advisers, and urges Firms to review the applicable resource attachment offered within the Risk Alert. This resource page links to rules, regulatory actions, enforcement actions, guidance, FAQs, etc. released by the SEC in an effort to provide guidance. AdvisorAssist Consultants are here and ready to assist Adviser’s in any compliance capacity needed. Should you have questions, please don’t hesitate to reach out today.

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