SEC Starts Reviews of Yet-To-Be-Examined RIAs

The Securities and Exchange Commission (SEC) says it has launched a previously announced initiative to audit registered investment advisers (RIAs) that have never been examined.

The initiative will be run by the SEC’s Office of Compliance Inspections and Examinations (OCIE). The federal regulatory agency says examiners will focus initially on firms that have been registered with the SEC for three or more years, but which have not yet been selected for review.

The SEC announced it would make examining these advisers a priority earlier this year, and now appears to be making good on the promise (see “SEC Outlines 2014 Examination Priorities”).

As part of the initiative, OCIE examiners will concentrate on the advisers’ compliance programs, filings and disclosure, marketing, portfolio management, and safekeeping of client assets. Details of the examination efforts are as follows:

  • Compliance Program – Registered investment advisers are required to adopt and implement written policies and procedures that are reasonably designed to prevent violations of the Advisers Act, says the SEC. OCIE staff will evaluate the effectiveness of each adviser’s compliance program. This evaluation will include a review of advisory books and records to determine if an adviser has adequately identified conflicts of interest and compliance-related risks, adopted appropriate policies and procedures to mitigate and manage those conflicts and risks, and empowered a competent chief compliance officer (CCO) to administer the compliance program.
  • Filings and Disclosures – Investment advisers must disclose all material facts regarding conflicts or potential conflicts of interest so that clients can make an informed decision regarding entering into or continuing an advisory relationship. Such disclosures should include information on the full scope of the adviser’s business, investment activities, and conflicts of interest. OCIE staff will analyze an adviser’s filings and disclosure documents to assess the content and scope of disclosures that have been made.
  • Marketing – Investment advisers may utilize marketing materials to solicit new clients or retain existing clients. OCIE staff will review marketing materials and evaluate whether an investment adviser has made false or misleading statements about its business or performance record; made any untrue statement of a material fact; omitted material facts; made any statement that is otherwise misleading; or engaged in any manipulative, fraudulent, or deceptive activities.
  • Portfolio Management – An investment adviser has an obligation to act in the best interests of its advisory clients and to identify, mitigate, and disclose any material conflict of interest. OCIE  staff will review and evaluate an investment adviser’s portfolio decision-making practices, including the allocation of investment opportunities and whether the adviser’s practices are consistent with disclosures provided to clients.
  • Safety of Client Assets – Registered investment advisers that have “custody” of client assets must take specific measures to protect client assets from loss or theft. OCIE staff will review an adviser’s compliance with the relevant provisions of the Advisers Act and other applicable law that are designed to prevent the loss or theft of client assets.

“Our examinations will focus on areas most important to protecting investors,” says Jane Jarcho, national associate director of OCIE’s investment adviser and investment company examination program. “We will also promote compliance by engaging with these advisers through outreach efforts.”

Starting later this year, the OCIE says it will invite SEC-registered investment advisers who have yet to be examined to attend regional meetings where they can learn more about the examination process.  Advisers also can find information regarding their obligations under the Investment Advisers Act of 1940 and other useful guidance on the SEC’s website.

Additional details on the examinations are available here.