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Written by Camilla Cater
Senior Director

The Securities and Exchange Commission’s (“SEC”) registered investment adviser (“adviser”) population encompasses a multitude of variances, from the small advisory firm to the multi-billion global asset manager, representing a diverse client base of individuals, trusts, investment companies, private funds and pension plans.

There are currently more than 15,000 registered investment advisers, overseeing more than $125 trillion in assets under management. Over the past few years, even during the COVID lock-downs, the SEC has continued to annually review around 15% of the adviser population, in spite of increasing numbers. Therefore, if you are a registered investment adviser who has not yet received “the call” from the Division of Examinations (“the Division”), you will be justified in wondering how close you are to the top of that list.

On September 6, 2023, the Division published a Risk Alert (“Alert”) providing guidance for advisers about the examination process and offering insights into the rationale for firm selection as well as outlining documents that may be requested. The Division has made it clear that it is providing this information so that advisers may better prepare themselves for an examination.

Selection Process

When it comes to selecting firms for examination, the Division follows a risk-based approach that will take into consideration factors such as changes in market conditions and industry practices, as well as areas of focus identified by the Division in their annual examination priorities memos.

The Division leverages technology to analyse large volumes of data from industry and firms, including Form ADV and Form PF filings, to identify potential risk areas. Therefore firms may be selected for a variety of reasons, including whether the Division has identified:

  • a firm-specific risk or characteristic that requires further consideration;
  • tips, complaints, referrals or adverse media naming the firm;
  • metrics requiring review due to the length of time since registration, e.g. newly registered advisers (this is a particular area of focus for the Division: see our article, 9 May);
  • prior examination observations and conduct, especially repeated deficiencies;
  • supervisory issues, including a firm’s disciplinary and disclosure history;
  • conflicts of interest and conflicts management;
  • material changes in a firm’s management, or personnel;
  • indications of financial or market stress; and

whether the firm has access to client and adviser assets, or presents other compliance risks.

Examination Focus

Once an adviser has been selected for review, the examiners will determine the scope of the examination, taking into consideration the adviser’s business model and associated risks as well as the reason for conducting the examination.

Core areas of review typically include:

  • operations;
  • disclosures;
  • conflicts of interest; and
  • compliance practices, with respect to matters like:
    • custody and safeguarding of client assets;
    • valuation;
    • portfolio management;
    • fees and expenses;
    • brokerage and best execution.

Information Request

Advisers selected for examination will typically receive a call from the Division to inform them that an examination has opened, and the Chief Compliance Officer will be promptly provided with an initial information request list that looks to provide the Division with:

  • general information, detailing the adviser’s business and investment activities;
  • information about the compliance risks identified by the adviser, and written policies and procedures to address these;
  • information for the Division staff, to assist in testing of advisory trading activity; and
  • information for the Division staff, to perform its own compliance testing.

This initial information request list will set out the method for securely sharing information with the Division as well as the time frame for the return of documentation. On this latter point, we have certainly seen requests for a very speedy return, so for firms that have not yet undertaken a mock examination to test response times, as well as robustness of controls, it is certainly worth looking at the “Typical Initial Information Examiners Request of Investment Advisers”, detailed below, in order to understand the breadth of a request.

What’s the takeaway?

As ever, with an SEC examination, preparation of documentation and staff is essential to presenting your firm in the best light. Mock audits can act as a regulatory rehearsal, helping firms to identify potential pressure points before a formal examination.

If you would like more information on how best to prepare, at RQC Group we can help you adequately prepare your firm for an SEC Examination.

Typical Initial Information Examiners Request of Investment Advisers

General Information
Organizational Information
  • Organizational structure, affiliations, and control persons.
  • Remote offices and branch locations.
  • Joint ventures or other businesses (including those with respect to the firm or any officer, director, portfolio manager, or trader).
  • Current and former supervised persons, officers, and/or directors.
Business and Operations
  • Committees (e.g., responsibilities, members, meeting frequency, meeting minutes).
  • Client advisory contracts or agreements.
  • Agreements and arrangements with third parties associated with the management of client accounts (e.g., sub-advisers, third-party managers, referrals, wrap fee programs, and third-party investment platforms used for clients).
  • Fees and payments for services rendered.
  • Power of attorney obtained from clients.
  • Service providers and the services they perform
Disclosures and Filings
  • Disclosure documents and filings with regulators (e.g., Form ADV, including the brochure, and Form CRS).
Legal and Disciplinary
  • Threatened, pending and settled litigation, arbitration, or Administrative Proceeding involving the adviser or any supervised person.
  • Remedial actions taken against supervised persons.
Information Regarding the Compliance Program, Risk Management, and Internal Controls
Compliance Program and Oversight Process
  • Compliance policies and procedures in effect during the examination period.
  • Tests performed (i.e., compliance reviews, quality control analyses, surveillance, and/or forensic or transactional tests performed by the firm).
  • Compliance consultant reports resulting from a review of compliance policies and procedures, operations, or books and records.
  • Annual and/or interim reviews of policies and procedures, including any reports prepared.
  • Record of compliance exceptions.
  • Remote office and/or independent advisory contractor oversight process.
  • Client complaints and correspondence and the process for monitoring such communications, including electronic communication.
  • Inventory of compliance risks and conflicts of interest that forms the basis for policies and procedures and notations regarding changes made to the inventory.
  • Written guidance and training provided to employees regarding compliance program and documentation of attendance.
  • Valuation process.
  • Pricing services, quotation services, and externally acquired portfolio accounting systems used in the valuation process and payment information.
  • Fair-valued and illiquid securities held by clients.
  • Advisory fee calculations.
  • Pricing overrides.
Information Processing, Reporting, and Protection
  • Safeguards for the protection of customer records and information.
  • Electronic access controls.
  • Business continuity plan.
  • Cybersecurity incidents or breaches (e.g., incident description, impact, and remediation)
Information to Facilitate Testing with Respect to Advisory Trading Activities
Information About Advisory Clients and Accounts
  • Current advisory client account information regarding: account inception, type, balance, and management discretion; client demographic information; client affiliation with the firm;
    custodial arrangements; firm authority with respect to the account (e.g., trading authority, custody, and trustee); services provided; investment strategy and investment objectives; portfolio manager; fee computation; fee payment arrangements; and consultant related to obtaining the client, if any.
  • Advisory clients lost during review period.
Portfolio Management
  • Securities held in all client portfolios, including information identifying each client holding an interest, the amount owned by each client, the aggregate number of shares or principal
    and/or notional amount held and total market value of the position.Information about certain types of client investments (e.g., private investments and initial public offerings).Publicly traded companies for which employees of the adviser or its affiliates serve as officers and/or directors.
  • Companies for which employees of the adviser or its affiliates serve on creditors’ committees.
  • Outside compensation to supervised persons including compensation related to client’s transactions or investments.
  • Client portfolio profile information (e.g., investment objectives, investment strategy, risk tolerance, suitability, and mandates).
Brokerage and Trading
  • Trade blotter.
  • Brokerage arrangements and best execution evaluation documentation.
  • Soft dollar budget and products and services obtained using clients’ brokerage commissions.
  • Commission-sharing arrangements.
  • Affiliated broker-dealers.
  • Principal trades and cross transactions.
  • Wrap fee programs.
  • Trade errors and related information.
  • Trade allocation information regarding initial public offerings and secondary offerings in which clients, proprietary accounts or access persons participated.
Conflicts of Interest and Insider Trading
  • Code of Ethics and insider trading policies and procedures for the firm and its affiliates.
  • Code of Ethics attestations.
  • Exemptions from Code of Ethics for supervised persons.
  • Reports of securities transactions reported by access persons.
  • Fee splitting or revenue sharing arrangements.
Information to Perform Testing for Compliance in Various Areas
Marketing and Advertising
  • Advertisements and marketing materials disseminated, including newsletters, public audio and video programs, pitch books, pamphlets, brochures, websites, blogs, social media, and
    other promotional and/or marketing materials used.
  • Client or investor meeting materials and presentations.
  • Sponsored and attended seminars or events.
  • Client performance information.
  • Composite performance information, including current and terminated composites and composite returns.
  • Requests for proposal, due diligence questionnaires, and any other questionnaire (e.g., third party consultant database or other performance database).
  • Testimonials and endorsements, including payments made and compensation received.
  • Third-party ratings and rankings.
Financial Records
  • Balance sheet, trial balance, income statement, and cash flow statements.
  • Cash receipts and disbursements journal.
  • General ledger and chart of accounts.
  • Loans and sales of firm or affiliate’s stock.
  • Custodian identification and contact information for entities that maintain custody of client assets.
  • Surprise examination documentation, such as engagement letters, client account lists, and reports, results, and recommendations.
  • Auditor engagement letters, opinions, and findings.
  • Custodial confirmation of positions for specific clients.

Please do contact us if you’d like information about our SEC Mock Audits, in preparation for a possible SEC Examination.


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