The SEC is coming; the SEC is coming!
The Securities and Exchange Commission?s (?SEC?s?) Office of Compliance Inspections and Examinations (?OCIE?) announced the Never Before Examined Initiative (?NBEI?). Below are the details about the SEC?s two distinct approaches in examining such registered investment advisors (?RIAs?).
Risk-Assessment Reviews
- High-level review of the RIA?s business to help the SEC understand that business with a focus on the compliance program and other essential documents such as Form ADV.
- Among the things, the SEC is likely to request:
a) Compliance policies and procedures;
b) Pending, threatened or settled litigation or arbitration concerning the RIA or any ?supervised person;?
c) Standard advisory contracts or agreements; and
d) Advertisements, pitch books or presentations.
Focused Review
- Comprehensive risk based exam focusing on higher risk area of business and operations selected for exam. These include:
1) Compliance Program – How effective is the program? The SEC will evaluate books and records for conflicts of interest and compliance related to risks. Has a competent Chief Compliance Officer (?CCO?) been empowered to manage the compliance task?
2) Filings/Disclosure ? Have material facts concerning potential conflicts of interest and actual ones been disclosed to clients and potential clients? The SEC will examine adviser?s disclosures in filings and disclosure documents regarding conflicts of interest, investing and the adviser?s business operations.
3) Marketing and Advertising ? Are marketing and advertising pieces accurate concerning business or investing performance? Were misrepresentations or omissions made in connection with the same?
4) Portfolio Management ? Do portfolio decisions result in conflict of interests or violate disclosures made to clients? Examples of such include allocation of investment opportunities.
5) Safety of Client Assets ? Loss or theft of assets are the responsibility of advisers who have ?custody? of client assets. Does the RIA have custody? A few accounts is enough to trigger SEC required audits.