RIA Compliance and Practice Management Blog

RIA Firms Need to Review these 4 SEC Risk Alerts from 2018

Posted by RIA in a Box

Feb 5, 2019 9:15:00 AM

2018 Top SEC RIA Risk AlertsIn 2018, the U.S. Securities and Exchange Commission ("SEC") Office of Compliance Inspections and Examinations ("OCIE") issued a series of registered investment adviser ("RIA") risk alerts. There are four particular risk alerts that are most relevant to traditional retail wealth management investments advisers: fee billing, best execution, cash solicitation, and electronic messaging. Risk alerts are generally issued based upon SEC OCIE staff observations and are designed to help RIA firms better "(i) assess their supervisory, compliance, and/or other risk management systems related to these risks, and (ii) make any changes, as may be appropriate, to address or strengthen such systems." 


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  1. Fee Billing

On April 12, 2018, the SEC OCIE released a new National Exam Program Risk Alert listing the most commonly found RIA advisory fee and expense compliance issues in recent regulatory examination deficiency letters. As it relates to fee billing issues, the risk alert highlights these key topics:

  • Billing based on incorrect account valuations
  • Billing fees in advance or with improper frequency
  • Applying incorrect fee rate
  • Omitting rebates and applying discounts incorrectly
  • Disclosures involving advisory fees
  • Adviser expense misallocations

SEC OCIE staff notes, "advisers should review their practices, policies, and procedures to ensure compliance with their advisory agreements and representations to clients in light of the fee and expense issues noted in this Risk Alert."

  1. Best Execution

On July 11, 2018, the SEC OCIE released a new National Exam Program Risk Alert outlining the most common compliance issues related to the RIA regulatory requirement to seek to obtain "best execution" for client transactions. As it relates to best execution issues, the risk alert highlights these key topics:

  • Performing best execution reviews
  • Considering material factors during best execution reviews
  • Disclosing best execution practices
  • Disclosing soft dollar arrangements
  • Establishing proper policies and procedures
  • Following policies and procedures

SEC OCIE staff reiterates, "the determinative factor [in an adviser’s best execution analysis] is not the lowest possible commission cost but whether the transaction represents the best qualitative execution for the managed account."

  1. Cash Solicitation

On October 31, 2018, the SEC OCIE released a new National Exam Program Risk Alert outlining the most common RIA compliance issues related to Rule 206(4)-3 (the “Cash Solicitation Rule”). As it relates to cash solicitation issues, the risk alert highlights these key topics:

  • Solicitor disclosure documents
  • Client acknowledgements
  • Solicitation agreements
  • Bona fide efforts to ascertain solicitor compliance

SEC OCIE staff notes an investment adviser required to registered under the Investment Advisers Act of 1940 (the "Advisers Act") "is prohibited from paying a cash fee, directly or indirectly, to any person who solicits clients for the adviser (a “solicitor”) unless the arrangement complies with a number of conditions."

  1. Electronic Messaging

On December 17, 2018, the SEC OCIE released a new National Exam Program Risk Alert reminding RIA firms of their obligations related to the use of electronic messaging. As it relates to electronic messaging issues, the risk alert highlights these key topics:

  • Policies and procedures
  • Employee training and attestations
  • Supervisory review
  • Control over devices

SEC staff notes, "OCIE conducted this initiative because it noticed an increasing use of various types of electronic messaging by adviser personnel for business-related communications." In addition, the SEC OCIE staff references two relevant investment adviser rules: 1) the Books and Records rule and 2) the Compliance Rule.

Be sure to check back soon as we continue to provide updates on relevant RIA regulatory compliance focus areas.

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Lexington Compliance and RIA in a Box LLC are not law firms, investment advisory firms, or CPA firms. Lexington Compliance and RIA in a Box LLC do 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.

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