The three types of audits that the SEC's Division of Examinations will conduct on RIA firms.
The SEC and state regulators can audit your RIA firm at any time, for any reason, announced or unannounced. These examination programs play a critical role in ensuring a culture of compliance with the rules and regulations of the RIA industry.
1. Routine Inspections
These are periodic, routine examinations, which are conducted to determine if investment advisory firms have the appropriate systems and controls in place in accordance with the current rules and regulations. Examiners also focus on how the policies and procedures are actually being carried out by the firm on a daily basis, while making the required disclosures to clients. Firm’s can expect examiners to compare the execution of operational and compliance practices to the information outlined in their Form ADV.
Routine inspections are detailed and comprehensive. Depending on the size and complexity of the RIA firm, the length of the inspection can last for a day or several weeks. These audits often occur within the first year of an RIA firm’s registration, and can sometimes be unannounced.
2. For Cause Inspections
As the title suggests, these inspections occur as a result of particular developments such as a client complaint or internal inquiry. These are typically unannounced examinations.
3. Sweep Examinations
Sweep examinations are conducted to gather information on the RIA firm's practice. The examiners typically focus on specific areas, such as advertising, custody, soft dollar arrangements, etc. These are also often surprise examinations.
It is common for most SEC and state-level RIA audits to be announced in advance to the RIA firm. However, many states frequently perform unannounced examinations in their respective jurisdictions.
Check out our blog post The Three Types of Audits an RIA Firm Should Know About
for more information.