How the Securities and Exchange Commission (SEC) determines which investment advisers to inspect and what areas those examinations typically cover were among subjects addressed in a new risk alert released by agency staff.
The alert, published Wednesday, seeks to help advisers prepare for a potential examination and ensure their compliance efforts meet the expectations of the SEC’s Division of Examinations. It included an attachment detailing the types of initial information SEC staff might request to receive electronically at the outset of an exam.
The SEC’s risk assessment process is dynamic and continuously refined, the alert said, but staff consider certain firm-specific risk factors when selecting advisers for examination, including:
- Prior examination observations, including regarding the quality of the compliance program;
- Supervisory concerns (i.e., disciplinary history);
- Tips received regarding the firm;
- The business activities of the firm and whether they might lead to conflicts of interest; and
- Material changes in firm leadership or other personnel.
“Once an adviser is selected for examination, additional risk assessment occurs to determine the scope of the examination,” the alert said. The firm’s business model, associated risks, or the reason the examination is being conducted each affect the scope of the inspection.
Though each examination is unique, typical focus areas include operation reviews, disclosures, conflicts of interest, and compliance practices. These are focused on topics including custody and safekeeping of client assets, valuation, portfolio management, fees and expenses, and brokerage and best execution, the alert said.
Document requests from the SEC seek for the firm to provide general business information, written compliance policies and procedures, and information to enable staff to test for compliance in certain areas.
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