RIA Compliance and Practice Management Blog

SEC Outlines RIA Examination Protocol during Compliance Seminar

Posted by RIA in a Box

May 17, 2016 10:24:34 AM

SEC RIA audit process

Recently, on April 19, 2016, the U.S. Securities and Exchange Commission (SEC) held a national compliance outreach seminar for investment companies and registered investment adviser (RIA) firms. The agenda included 2016 fiscal year exam priorities, potential 2017 fiscal year exam priorities, enforcement cases, examination findings, Chief Compliance Officer (CCO) liability, cybersecurity, and proposed anti-money laundering (AML) requirements.

Another topic covered during the seminar was typical investment adviser exam protocol including tips on how an RIA firm should interact with examiners after it receives notice from the SEC that the firm going to be audited, the various types of investment adviser audits, and what a firm should do once it receives a deficiency letter following the examination.

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During the seminar, SEC staff members outlined several different types of investment adviser audits that may occur:

  • For cause exams: These exams are generated by tips, but the SEC examination staff will not inform the firm that the tips or suspicions raised are the reason for the exam. Often these exams will focus more on a particular area of concern.
  • Risk assessment exams: Generally, an overall review of the firm's compliance program.
  • Never before examined: The SEC continues to focus on auditing RIA firms that have not been previously examined as part of its national exam program for never before examined advisers.
  • Corrective action reviews: The agency returns to audit an RIA firm to ensure that deficiencies from a previous examination have been properly addressed.
  • Surprise exams: Almost always the SEC will give prior notice of an audit to be conducted, but on rare occasion, it will conduct an unannounced, surprise audit.

In addition, SEC staff members provided the following guidance during the seminar directed to RIA firms that are going through their first examination: 

  • Typically, the SEC examiners will start the examination process with a phone call announcing that they will be coming to the firm's office to perform an exam. Consider this phone call to be the beginning of the examination process.
  • Following the phone call, often a request list of documents will be sent to the firm. Be sure to provide all of the items needed for examiner review prior to arrival. If there are questions on any of the requested items, do not hesitate to ask the examiners.
  • Throughout the audit process, be well prepared and transparent with the examination staff with open dialogue. 
  • When the examination staff arrives on-site, be sure to have a comfortable location in the office for them to set up.
  • Before the on-site component of the examination process is completed, an exit interview be conducted with the firm.
  • Following the examination, generally a deficiency letter will be issued. It's important to note that almost every firm will receive a deficiency letter following an audit.
  • Typically, a firm should respond to a deficiency letter within 30 days describing how the firm is going to rectify each item listed in the letter. Remember to be specific in the response on how the firm is going to solve each deficiency. An initial detailed response will greatly reduce the likelihood of additional correspondence.

The SEC staff also emphasized that it's important to remember that the goals of the RIA examination program are to promote compliance and uncover fraud. The staff also reiterated that proper compliance is not only a CCO responsibility, but rather the proper culture of compliance must be adopted be the firm as a whole.

The full replay of the SEC's online webcast will likely soon be available on the SEC website and as RIA compliance consultants, we highly recommend that the CCO of all investment advisory firms review the webcast when made available. The webcast was very well done and offers quite a bit of valuable insight from a number of senior SEC staff members.

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Topics: RIA Operations, 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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