The Securities and Exchange Commission tries to be transparent about the areas of examination. The Division of Examinations publishes its exam priorities each year. Of course, in practice it may vary from region to region and examiner by examiner. A new risk alert focuses on what an registered investment adviser should expect from an exam.
As it has stated many times over the years, the Division once again states in the Risk Alert that it takes a “risk-based approach” to selecting exam targets. The Division also adds in that a firm could be picked because of the interest in a particular compliance risk area (a sweep exam?), or a tip, complaint, or referral (a for-cause exam).
The Division does list 11 factors for selecting an adviser for examination:
- prior examination observations and conduct, such as when the staff has observed what it believes to be repetitive deficient practices during more than one review of a firm, significant fee- and expense-related issues, and significant compliance program concerns;
- supervisory concerns, such as disciplinary history of associated individuals or affiliates;
- tips, complaints, or referrals involving the firm;
- business activities of the firm or its personnel that may create conflicts of interest, such as outside business activities and the conflicts associated with advisers dually registered as, or affiliated with, brokers;
- the length of time since the firm’s registration or last examination, such as advisers newly registered with the SEC;
- material changes in a firm’s leadership or other personnel;
- indications that the adviser might be vulnerable to financial or market stresses;
- reporting by news and media that may involve or impact the firm;
- data provided by certain third-party data services;
- the disclosure history of the firm; and
- whether the firm has access to client and investor assets and/or presents certain gatekeeper or service provider compliance risks.
I think the key for most firms is number 5: How long has been since you’ve had an exam. If it’s been at least six years, the clock is ticking. If it’s been seven years, have a stack of documents ready.
To help you with that stack of documents, the Risk Alert includes an attachment with the staff’s typical initial request for documents and information.
I think it’s great that the SEC published this information. I do find it strange to be labeled as a “Risk Alert.” Those are usually to highlight areas where the Division is seeing problems in examinations. I find it hard to believe that registered investment advisers are being surprised that examiners are knocking on their doors or surprised at the scope of information. It can be a lot. In my recent exam I produced over 800 documents.
Sources: