With the new year here, the SEC is beginning its registered investment adviser inspection program.
There are, generally, routine, compliance, cause and sweep examinations and inspections. Depending upon where your investment adviser sits, the RIAmay be subject to one of these examinations. Generally, new RIAs are more, frequently, examined than those that have an established history. Of course, this is different if it were part of a cause examination or a sweep examination. Further, depending upon the type of examination, the SEC inspection will cover a broad range of matters, including, but not limited to, the form ADV, filings and reports, the financial condition, internal controls, portfolio management, conflicts of interest and brokerage and execution, among other things.
More importantly, the SEC has announced that it really is looking for a culture of compliance. That is, the SEC will review RIAs to see the importance compliance plays at the firm by examining where risk is reported, routine reports to senior management, regular evaluation, compliance calendars, checklists and work papers, among other things.
In preparation for these exams, RIAs are strongly encouraged to review all of their documentation to see if there are any issues that maybe corrected before the SEC arrives. Further, RIAs need to educate personnel in interfacing with the SEC so as to ensure candor and cooperation. This training is as detailed as arranging for a conference room or office space for the SEC, and politely restricting the SEC staff from roaming freely around the offices. When undergoing inspections, RIAs should maintain a list of all documents provided to the SEC. A best practice would be for the RIA to appoint one person as the contact person with SEC to discuss issues and be the gatekeeper for questions coming from the SEC. RIAs must be organized to meet with the examiners, and answer their questions candidly and provide them with the information requested so that the inspection will take as little time as possible. Finally, advisers should be prepared to receive and respond to follow-up from the SEC, including, but not limited to, deficiencies.
Advanced planning will play a large role in ensuring a smooth SEC examination, and, hopefully, providing RIAs with some peace of mind.