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SEC issues risk alert over selection of RIAs for examinations

On Behalf of | Sep 11, 2023 | Financial News

The Securities and Exchange Commission issued a risk alert regarding its examination process for registered investment advisers, according to AdvisorHub.

In the alert, the commission’s Division of Examinations detailed the steps it takes in determining which firms to examine, what documents to request, and which areas it chooses to focus on.

The Division noted that it uses a risk-based approach for selecting advisers to examine and in determining the scope of risk areas to examine.  Each year about 15% of the 15,000 advisers registered with the SEC are targeted for examinations.

The commission said some of the reasons it may select an adviser to examine include the firm’s risk characteristics; a tip, complaint, or referral, or the staff’s interest in a particular compliance risk area. Firms may be chosen for examination based on such factors as their prior examination or conduct records, conflicts of interest, changes in leadership, supervisory history, or the length of time since their registration or last examination.

The SEC publishes its annual priorities to give advisers insight on areas believed to pose potential risks to investors and the capital markets, and when selecting advisers to examine, it consider which advisers provide services, recommend products, or otherwise meet criteria relevant to the focus areas described in the priorities.

Once an adviser is selected for an examination, the Division of Examinations conducts additional risk assessment to determine the scope of the exam and the documents that will be requested.

As part of the process, a letter will typically be sent notifying the firm of the upcoming examination.  The letter contains an initial request list identifying certain information, including documents that the staff will review.

The SEC noted that “advisers may be selected for an examination in order for the staff to evaluate risks present at that particular firm, to respond to events that pose risks to investors and the markets more broadly, and/or to assess how registrants are adapting to new regulatory requirements.”

The Division said it was issuing the risk alert so that advisers may prepare themselves for an
examination, adding that the information provided may assist firms in their compliance efforts.

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