RIA Compliance and Practice Management Blog

A Review of the Top 2021 SEC RIA Risk Alerts

Posted by RIA in a Box

Jan 13, 2022 12:37:36 PM

Top 2020 SEC RIA Risk Alerts and Rule ChangesThroughout the year, the Securities and Exchange Commission's ("SEC") Division of Examinations ("Division") releases various risk alerts flagging compliance risks and concerns related to registered investment adviser ("RIA") firms. Risk alerts are typically issued as a result of a large number of compliance deficiencies uncovered during regulatory examinations. To help keep you and your firm up-to-date, RIA in a Box releases blog posts summarizing risk alert announcements and rule changes as they occur.

10 Steps to Prepare for a Reguatory Exam

Given that context, paying attention to risk alerts throughout the year might be one of the most important things you do for your advisory business. But we understand that you’re busy with managing client relationships and all the other concerns of running a business, so we stay on top of alerts for you. Let’s review the SEC’s RIA regulatory compliance announcements for the year:

1.SEC Issues RIA Risk Alert on Digital Asset Securities (April 2021)

On February 26, 2021, SEC Division of Examinations released a risk alert, titled “Continued Focus on Digital Asset Securities”. In this release, the Division of Examinations’ addressed its focus on the activities related to the offer, sale, and trading of securities known as “Digital Asset Securities”. The Division made it clear to investment advisors that digital assets along with use of distributed ledger technologies are a focus area for future examinations and disclosed the related risks identified during recent examinations. The key compliance components highlighted in this release for investment advisors’ 2021 and future examinations were portfolio management, books and records, custody, disclosures, pricing client portfolios and lastly registration accuracy.

2. SEC Issues RIA Risk Alert for ESG Investments (April 2021)

On April 9th, 2021, the SEC released a risk alert summarizing the findings from the then recent examinations of RIA firms and private funds offering environmental, social, and governance “ESG” products and services. In this release, the Division stated it had observed firm’s different approaches to ESG investing and discussed the risks associated with a lack of standardized ESG definitions. Some of the key takeaways for RIAs regarding compliance considerations with ESG investing include:

Examinations of Investment Advisers and Funds:

  • Portfolio Management: RIA firms can expect the Division to assess the consistency between their disclosures and their portfolio management practices and polices related to ESG investing. Additionally, Division staff will evaluate the use of ESG terminology in the disclosures and the firm’s due diligence for the ESG investing approaches. Proxy voting decision-making processes will be assessed for consistency with ESG disclosures and marketing materials.
  • Performance Advertising and Marketing: Examinations will focus on reviewing firm’s regulatory filings, websites, communications with clients and prospective clients, marketing materials, and due diligence questionnaires for consistency with the firm’s claims related to ESG investing.
  • Compliance Programs: The Division will evaluate firm’s written policies and procedures related to ESG as well as assess the implementation and compliance supervision of the policies in place.

The blog post further gives examples of deficiencies, as well as examples of the published compliance best practices for ESG investments. The Division concludes the risk alert by emphasizing the importance of firms to implement proper compliance measures and continue consistency within their practices.

3. SEC Releases Investment Adviser Risk Alert on Wrap Fee Programs (July 2021)

On July 21, 2021, the SEC Division of Examinations issued a risk alert discussing the findings from examinations of more than 100 investment advisers registered with the SEC associated with wrap fee programs. Wrap fee programs allow investment advisers to offer a bundled comprehensive fee to their clients, versus multiple charges for investment advice, brokerage services, administrative expenses, and other fees. The Division stated their decision to focus on this issue is due to the persistent growth of investor assets in wrap fee programs and the observed conflicts and disclosure practices. The key focus areas of examinations and common cited deficiencies in the alert included the consistency with fiduciary obligations, the accuracy of the examined advisers’ disclosures, and the effectiveness of the examined advisers’ compliance programs. This blog post discussed these, as well as outlined the Division's compliance best practices for wrap fee programs.

4. SEC Issues RIA Risk Alert for Online Investment Advisers (November 2021)

On November 9th, 2021, the SEC Division of Examinations issued a risk alert discussing the findings from a series of examinations of RIA firms providing robo-advisory services.

The SEC’s “Electronic Investment Advice Initiative” focused on how advisers adhered to their fiduciary duty to provide clear and adequate disclosures regarding the nature of the advisers' performance history and services, and how the advisers act in their clients' best interests. This risk alert blog post provided an overview of some of common cited regulatory compliance deficiencies and specific examples from the risk alert as well as the following best practices for robo advisers to improve compliance:

  • Adopt, implement, and follow written procedures specific to the adviser's practice. 
  • Conduct frequent testing of algorithms.
  • Safeguard algorithms from unauthorized changes
  • Review portfolio management practices and related disclosures to ensure they are consistent with the Advisers Act as well as federal securities laws, as applicable.
  • Review registration eligibility if relying on the Internet adviser exemption.

We strongly encourage the Chief Compliance Officer ("CCO") for all RIA firms relying on the Internet adviser registration exemption to review this risk alert in depth.

5. SEC Issues Investment Adviser Risk Alert for Fee Calculations (November 2021)

On November 10th, 2021, a risk alert describing the findings from the recent Advisory Fees Initiative examinations of RIA firms was released. Under this initiative, the agency conducted 130 examinations of SEC-registered investment advisory firms. Examiners focused on whether advisers have adopted and are following policies and procedures for fair and accurate billing practices.

In this blog post on the risk alert, the following common compliance deficiencies were highlighted:

  • Compliance programs, including policies and procedures and testing
  • Portfolio management, including fiduciary duty, disclosures, and conflicts
  • Marketing and performance advertising
  • Cybersecurity and protection of client information
  • Registration

6. SEC Issues Statement for RIA Firms on Form CRS (December 2021)

On December 17th, 2021, the SEC Standards of Conduct Implementation Committee released a statement regarding Form CRS. The Committee's document provided examples of compliance shortcomings and best practices found during reviews of RIA firm's Form CRS filings. According to the SEC, the Form CRS "is intended to inform retail investors about: (i) the types of client and customer relationships and services the firm offers; (ii) the fees, costs, conflicts of interest, and required standard of conduct associated with those relationships and services; (iii) whether the firm and its financial professionals currently have reportable legal or disciplinary history; and (iv) how to obtain additional information about the firm." The Committee made the following observations and recommendations elaborated upon in the blog post: 

  • Firms must avoid legal jargon and technical business terms
  • Do not omit required disclosures
  • Follow the final instructions to Form CRS.
  • Firms need to provide more specific information and/or references in the summary sections related to their services, fees, costs, and conflicts of interest. This information must match the details provided on Form ADV, Part 2A. If the Form CRS states that more detailed information can be provided in the firm’s Form ADV, there must be a method to readily access that information
  • Include detailed descriptions
  • Firms cannot omit information or fail to respond to the disciplinary history disclosure
  • Include clear descriptions of any affiliated firms 
  • to make Form CRS easy to read and understand for investors. 
  • Refrain from using marketing language
  • Tailor the boilerplate to the firm's particular services, fees, relationships, and/or conflicts.

Want to know you are following best practices? Schedule a demo to see what RIA in a Box can do for you.

RIA in a Box LLC is not a law firm, investment advisory firm, or CPA firm. RIA in a Box LLC does not provide legal advice or opinions to any party or client. You should always consult your relevant regulatory authorities or legal counsel if applicable.

Topics: RIA Compliance

RIA in a Box LLC is not a law firm, investment advisory firm, or CPA firm. RIA in a Box LLC does not provide legal advice or opinions to any party or client. You should always consult your relevant regulatory authorities or legal counsel if applicable.

RIA Compliance & Practice Management

Stay up to date on the latest RIA compliance, operations, and technology topics.

Hear from industry experts as they keep you up to date on the latest regulatory developments and practice management topics.

Subscribe to Email Updates

Recent Posts