SEC Issues a Risk Alert Providing Details on the Investment Adviser Examination Process

Who may be interested: Investment Advisers.

Quick Take: The staff of the SEC’s Division of Examinations (Staff) recently issued a Risk Alert which describes the process and criteria the Staff use in selecting investment advisers to examine as well as the scope of what will be reviewed during an exam. The Risk Alert includes an attachment titled “Typical Initial Information Examiners Request of Investment Advisers” which is a helpful resource for advisers to understand what to expect during an SEC examination.

The Risk Alert states that the Staff utilize a risk-based approach in selecting investment advisers to examine and in determining the scope of an adviser’s exam. Factors considered in selecting advisers for examination include a firm’s risk characteristics and firm-specific risk factors, receipt by the Staff of a tip, complaint or referral, and the Staff’s annual exam priorities. By way of example, the Risk Alert explains that an adviser might be selected for examination so Staff can evaluate risks at the particular firm, respond to events that present risks to investors or the markets, or to assess how registrants are adapting to new regulatory requirements.

The Risk Alert also explains that the scope of an examination and the documents requested varies depending on a firm’s business model, associated risks, and the Staff’s reason for conducting the examination. However, exams will typically include a review of an adviser’s operations, disclosures, conflicts of interest, and compliance practices in certain core areas (such as custody and safekeeping of client assets, valuation, portfolio management, fees and expenses, and brokerage and best execution).

The Risk Alert states that Staff typically send a request list of documents and information the Staff will review during an examination. The initial request typically includes:

  • general information, which provides the Staff with an understanding of the adviser’s business and investment activities;

  • information about the compliance risks that the adviser has identified and the written policies and procedures the firm has adopted and implemented to address each of those risks;

  • information to facilitate testing with respect to advisory trading activities; and

  • information for the Staff to perform its own testing for compliance in various areas.

The Risk Alert and “Typical Initial Information Examiners Request of Investment Advisers” can be found here.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm or its clients, or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.