RIA Compliance and Practice Management Blog

What Could Cause Your RIA Firm to Undergo an Audit?

Posted by RIA in a Box

Mar 10, 2014 12:07:00 PM

The SEC and the state regulators are granted examination authority by Section 204 of the Investment Advisers Act of 1940.  The language states that, “All records (as so defined) of such investment advisers are subject at any time, or from time to time, to such reasonable periodic, special, or other examinations by representatives of the Commission as the Commission deems necessary or appropriate in the public interest or for the protection of investors.”

The Office of Compliance Inspections and Examinations ("OCIE") is the branch for the SEC that administers the SEC's nationwide examination and inspection program. On the other hand, individual states generally have an examinations division that administers the inspection program. Many states follow the majority of the North American Securities Administrators Association (NASAA) model rules.

These programs are designed to detect fraud and other violations of the securities laws, foster compliance with those laws and help ensure that the SEC is continually made aware of developments and areas of potential risk related investment advisory firms. These examination programs play a critical role in ensuring compliance with the rules and regulations of the registered investment advisor (RIA) industry. Ultimately, investment adviser regulators are looking to help protect the citizens of their respective jurisdictions. As such, in the "Post-Madoff" RIA regulatory environment, investment advisers should expect more targeted examinations.    

Generally, there are three types of in-office RIA compliance examinations:

  1. Routine Inspections – These are periodic, routine examinations are conducted to determine if investment advisory firms have the appropriate systems in place and are carrying out their activities in accordance with the rules and regulations while making the required disclosures to clients. These examinations are detailed and comprehensive, and can last from a day to as long as several weeks depending on the size and complexity of the RIA firm. These audits often occur within the first year of an RIA firm’s registration and can at times be unannounced, surprise examinations; 
  2. For Cause Inspections – Regulators may investigate an investment advisory firm due to client complaints or internal inquiries and are usually surprise examinations; or
  3. Sweep Examinations – These examinations are conducted to gather information for a few or even just one section of the RIA firm's practice. These areas, for example, may be advertising, custody, soft dollar arrangements, etc. and are often surprise examinations.

It is common for most SEC and state-level RIA audits to be announced in advance to the investment adviser. However, there are a number of states that frequently perform unannounced investment adviser examinations in their respective jurisdictions. It is also not entirely uncommon for the SEC to perform an unannouned RIA audit. When the examination is announced, the announcement will often come via email, letter, and/or fax and will likely contain the following information: 

  • Identify that the state or SEC is conducting an examination of your RIA firm and the purpose of the examination is to assess your compliance with provisions of the Advisers Act;
  • A document request list for you to provide and submit to the state or SEC to be reviewed prior to the on-site exam.  This list will be included in the letter and the examiner will review these items prior to coming to your office; 
  • Lastly, the letter will identify the date of the on-site examination. The expectation is that you will cooperate fully during this process and make adequate office facilities available to the staff during the on-site examination to ensure the efficiency of the examination.

Often, as RIA compliance consultants, we find that many investment advisory firms are most concerned about the actual day of examination which is quite understandable. However, it is very important for RIA firms to take great care in responding to the document request list as instructed because that is the true beginning of the RIA compliance examination.

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


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