SEC Examination Priorities & What It means For Firms in 2020

Cory Roberson, Principal FIN Compliance

January 7, 2020. The SEC Office of Compliance Inspections and Examinations (OCIE) announced its examination priorities for the new year. The commission publishes its annual report to enhance the transparency of its examination program and to guide firms with its risk-based methodologies. 

The report is designed to addresses the potential risks to investors and to maintain the integrity of U.S. capital markets through a look into the business practices of its registrants. 

The following information is a summary of the full SEC Examination Priorities report listed here:  https://www.sec.gov/about/offices/ocie/national-examination-program-priorities-2020.pdf

How does this report apply to RIA Compliance Programs?

As a part of its broad sweeping examinations, the commission monitors the compliance programs of RIAs to determine if the firm’s policies and procedures are reasonably “designed, implemented, and maintained”.  

In addition, the SEC requires firms to conduct a review of policies and procedures on at least an annual basis (ref. SEC Rule 206(4)-7).

SEC staff typically assesses the compliance programs of RIAs in one or more core areas:

(1) suitability/appropriateness of asset class selections & fees,

(2) portfolio management practices (e.g. disclosure of business activities),

(3) custody and safekeeping procedures for client assets,

(4) best execution procedures (e.g. Rule 605/606, comparison of brokerage fees),

(5) fees and expense summaries, and

(6) valuation methodologies (e.g. NAV, fair value, illiquid securities).

RIAs with Dual Registrations and/or affiliations with Broker-Dealers

The OCIE will conduct examinations of RIAs that are “dually registered as, or are affiliated with, broker-dealers, or otherwise have related persons who are registered representatives of broker-dealers”.

Amongst the areas of focus will include:

(1) best execution practices (e.g. brokerage costs),

(2) prohibited transactions (e.g. FINRA, firm policies),

(3) fiduciary advice/standard of care (e.g. justification for investments, see Pg. 10*), and

(4) disclosure of conflicts/arrangements (e.g. fees, commissions, or incentives).

RIAs who use third-party asset managers

Examiners will review its registrants that utilize the services of third-party asset managers to oversee clients’ investments.  The SEC will review the RIAs’ due diligence practices, policies, and procedures.

Moreover, the OCIE heightens the importance for disclosures, amongst other things, of RIAs offering its clients innovative investment strategies, such as sustainable and responsible investing, that incorporates environmental, social, and governance (ESG) criteria. 

In addition, the commission will review any other third-party arrangements, such as referral and/or solicitor programs of its registrants.

How will the SEC examine RIA’s in 2020?

The commission will continue to conduct risk-based examinations of RIAs that have:

(1) Never been examined (new or old firms), and/or

(2) Were previously examined (several years ago). 

For previously examined registrants, the commission will assess whether the firm’s compliance programs are updated for changes in its business model and/or overall growth. 

Not coincidentally, our firm witnessed an uptick in the number of streamlined SEC examinations in the last part of 2019.  Most of these streamlined exams required firms to send documentation into an SEC Secure portal as opposed to a lengthy full scope exam that typically includes an office visit.

RIA’s who are Robo (“internet only”) Advisors

The commission will also focus on RIAs that provide services to their clients through automated platforms, also known as “robo-advisers.”

Areas of exam focus include, among others:

(1) SEC registration eligibility (e.g. internet only status, doesn’t exceed 15 other clients**),

(2) cybersecurity policies and procedures,

(3) marketing/advertising practices,

(4) fiduciary duty practices, including adequacy of disclosures, and

(5) overall effectiveness of compliance programs.

**An internet only advisor provides advice exclusively through an interactive website.  To maintain “internet only” status, firms may provide non-internet/other investment advice to fewer than 15 clients during the preceding twelve months.  Ref. Internet adviser relying on SEC Rule 203A-2(e).

RIAs and Private Funds

OCIE staff will examine private fund advisors (“RIAs to private funds”) that provide management to separately managed accounts alongside private funds.

Moreover, OCIE will review RIAs to private funds to assess compliance risks, including:

(1) controls to prevent the misuse of material non-public information, and

(2) conflicts of interest, (e.g. disclosures of fees and expenses, and the use of third parties).

Private funds are typically managed in a combination of: (1) registered investment advisors, (2) registered investment companies, and/or (3) exempt reporting advisors.

SEC Guidance and Risk Alerts released in 2019

The SEC published eight reports that included the following:

(1) Investment Adviser Compliance Issues Related to the Cash Solicitation Rule;

(2) Risk-Based Examination Initiatives Focused on Registered Investment Companies;

(3) Observations from Investment Adviser Examinations Relating to Electronic Messaging;

(4) Transfer Agent Safeguarding of Funds and Securities;

(5) Investment Adviser and Broker-Dealer Compliance Issues Related to Regulation S-P—(6) Privacy Notices and Safeguard Policies;

(7) Safeguarding Customer Records and Information in Network Storage—Use of Third-Party Security Features;

(8) Observations from Examinations of Investment Advisers: Compliance, Supervision, and (9) Disclosure of Conflicts of Interest; and

(10) Investment Adviser Principal and Agency Cross Trading Compliance Issues.

The reports are available on the SEC’s public website.

Other takeaways from this examination report

(1) RIA examinations are largely risk-based,

(2) OCIE staff examined approximately 15% of all firms in 2019,

(2) Form CRS/Reg B-I disclosure forms are required for RIAs and Broker-Dealers by 6/30,

(3) Asset class selection violations can bring an SEC enforcement case (e.g. fines),

(4) The number of SEC firms increased from approximately 11,500 to 13,475 over the last five years.  

Other Regulatory issues discussed in this report

Please review the examinations report for information on:

Digital Assets

Broker-Dealers

AML Programs (for Broker-dealers and investment companies)

FINRA and MSRB

Clearing Agencies,

And More 

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About FIN Compliance 

FIN Compliance  (FinCompliance.io) is a consortium of compliance, consulting, and business management solutions designed to help boutique investment firms to structure, maintain, and develop their internal regulatory review programs.  

Our product line consists of:  RIA Consults-Roberson Consults Group, a compliance consulting firm, RIA Review, a compliance-management system, B-D Review, a Hybrid-management system (est. in 2020)*, and FIN Lancer, a Business/Task Management system. 

Impact/Missions

FIN Ventures focuses on business strategy consulting for impact-based projects (FINVentures.io).  

FIN Missions (FINmissions.com) provides business/vision support group sessions for other entrepreneurs and youth mentoring.  In addition, Cory has volunteered for more than fifteen youth programs in locations such as like S. Korea, China, S. Africa, Thailand, and India.

Contact:  Cory Roberson - Cory@RIAconsults.com