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SEC Outlines 2020 RIA Examination Priorities

Posted by RIA in a Box

Jan 15, 2020 9:45:00 AM

2020 SEC RIA examination audit priorities top focus areas

On January 7, 2020, the Securities and Exchange Commission ("SEC") Office of Compliance Inspections and Examinations ("OCIE") released its annual top exam priorities for the 2020 calendar year. OCIE is the SEC division which conducts examinations of registered investment adviser ("RIA") firms and this priority list can help investment advisers be better properly prepared for a regulatory examination. In general, the list of priorities for 2020 contains many similar focus areas as highlighted in the agency's 20162017, 2018, and 2019 examination priority lists as well as recently issued risk alerts

How an RIA Firm Can Create a Culture of Compliance Checklist

For 2020, as it relates to RIA firms, the SEC is primarily focused on the following categories: 1) fraud, sales practices, and conflicts, 2) retail-targeted investments, 3) standards of care, 4) financial technology and electronic investment advice, 5) compliance programs, and 6) cybersecurity.

Considering the approximate month-long government shutdown, there was a slight year over year decrease in examinations completed:
  • In the 2019 fiscal year, OCIE completed 3,089 examinations compared to over 3,150 in 2018. (-2.7%)
  • Examinations of about 2,180 RIA firms took place, covering approximately 15% of total investment adviser firms compared to approximately 17% in the 2018 fiscal year. 

OCIE states that within the priority areas, the agency will be particularly focused on these common and emerging RIA regulatory compliance issues:

  • Fraud, Sales Practices, and Conflicts: Specifically, "It is critically important that registered firms provide investors with the disclosures required by the federal securities laws, including those relating to fees and expenses, and conflicts of interest, which will help enable the investing public to make better informed choices. Registered firms must effectively implement controls and systems to ensure those disclosures are made as required and that a firm’s actions match those disclosures." The SEC OCIE will continue to focus on advice to specific types of retail investors such as seniors, teachers, and military personnel. In addition, examiners will review higher-risk types of investments such as private placements with a particular focus on products with less transparency, high fees, and potential conflicts or affiliations with the adviser recommending the investment.
In regards to an RIA firm's fiduciary duty, "OCIE will also continue to examine RIAs to assess whether, as fiduciaries, they have fulfilled their duties of care and loyalty." Furthermore, "this will include assessing, among other things, whether RIAs provide advice in the best interests of their clients and eliminate, or at least expose through full and fair disclosure, all conflicts of interest which might incline
an RIA, consciously or unconsciously, to render advice which is not disinterested."
  • Retail Investors: The SEC examination staff highlights that "certain securities products can pose elevated risks when marketed or sold to retail investors, whether as a result of the characteristics of those securities, the dynamics in the markets, or due to the significant amount or concentration of assets retail investors have invested in a product." In particular, as it relates to RIAs recommending the use of mutual funds to their clients, "OCIE will continue to prioritize the examination of financial incentives provided to financial services firms and professionals that may influence the selection of particular mutual fund share classes."
  • Standards of Care: In addition to the new Form CRS requirement which takes effect for many SEC-registered RIA firms in 2020, the SEC also concurrently released its Interpretation Regarding Standard of Conduct for Investment Advisers. In addition to focusing on the new Form CRS, the SEC will examine whether an RIA firm's "fiduciary duty that comprises duties of care and loyalty to their clients" is being properly met by the firm.
  • Financial Technology and Electronic Investment Advice: As it relates to internet-only and other online investment advisers, the areas of focus will include: 1) SEC registration eligibility, 2) cybersecurity policies and procedures, 3) marketing practices, 4) adherence to fiduciary duty, including adequacy of disclosures, and 5) effectiveness of compliance programs. 
  • RIA Compliance Programs: Examinations will continue to zero in on whether RIA firms have compliance programs and policies and procedures which "are reasonably designed, implemented, and maintained." In addition, OCIE will particularly focus on RIAs that are dually registered or are affiliated with broker dealers. For hybrid RIA firms, focus areas will include "whether the firms maintain effective compliance programs to address the risks associated with best execution, prohibited transactions, fiduciary advice, or disclosure of conflicts regarding such arrangements." It's also noted that OCIE will "also prioritize examining firms that utilize the services of third-party asset managers to advise clients’ investments to assess, among other things, the extent of these RIAs’ due diligence practices, policies, and procedures."
  • Information Security: As has been the case in recent years, the SEC will continue to prioritize cybersecurity during examinations of investment advisers. With that focus, the agency will continue to focus on 1) governance and risk management, 2) access controls, 3) data loss prevention 4) vendor management, 5) training, and 6) incident response and resiliency. As it relates to vendor due diligence, "OCIE will also focus on oversight practices related to certain service providers and network solutions, including those leveraging cloud-based storage."

In addition, "OCIE will continue to conduct risk-based examinations of RIAs that have never been examined, including new RIAs and RIAs registered for several years that have yet to be examined."

As RIA compliance consultants, we strongly recommend that the principals and Chief Compliance Officer of all investment advisory firms registered with the SEC, regardless if the firm has been examined before or not, review the contents of the SEC 2020 exam priority document. Furthermore, past exam priority lists released in prior years should also be reviewed. Links to these past investment adviser audit priority lists are here:

Download Our Free How to Prepare for an RIA Regulatory Exam Checklist

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.

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