Compliance and Regulatory Alerts | 04-06-23
SEC Exams Division Issues Risk Alert for Newly Registered Advisers on Compliance Deficiencies and Guidance to Address
On March 27, 2023, the SEC Division of Examinations (“the Division”) issued a Risk Alert focused on compliance deficiencies found in examinations of newly registered advisers. The Division said these advisers may face unique risks, particularly as to conflicts of interest, and cautioned them to review their policies and procedures, disclosures, and marketing practices. The Division also explained—perhaps as guidance for these new registrants—that their examinations were “an opportunity for early engagement between advisers and the staff.” Here’s a brief summary of what that means.
In pointing out compliance deficiencies observed during recent examinations of new adviser registrants, the Division highlighted deficiencies in three verticals: policies and procedures, disclosure, and marketing.
The Division identified failings in procedures and controls, highlighting observed deficiencies in key risk areas, such as portfolio management and billing; the periodic testing and evaluation of compliance with firm policies (e.g., on best execution); and ensuring that advisory personnel were following firm policies. On personnel compliance, the Division underscored its observation that annual compliance reviews often failed to address the adequacy of compliance with procedure or the effectiveness of their implementation. The Division offered several examples, including (i) the use of off-the-shelf compliance manuals not tailored to the advisers’ operations and business lines; (ii) conflicts of interest that occur when advisory personal have multiple roles and responsibilities; (iii) failures to review the use of compliance outsourced to third parties; and (iv) failures to have adequate business or succession plans.
The Division found many examples of required documents which omitted information, provided inaccurate information, or were untimely delivered. These included documents on required disclosure as to fees and compensation; business operations and scope of services, advisory services offered to clients, (i.e., investment strategy, aggregate trading, and account reviews); conflicts of interest; and disciplinary information.
The Division discovered misleading information in public materials on a host of issues, including on an adviser’s professional credentials, third party rankings, and business performance.
To support newly registered advisers, the Division included a resource chart (pp. 6-7) with links to relevant laws and rules, regulatory actions, guidance, speeches, no-action and interpretive letters, enforcement actions, and educational materials.
As with the SEC’s risk alerts generally, the Division recommends that newly registered advisory firms assess their supervisory, compliance, and/or other risk management systems and make changes to strengthen such systems. The Division emphasizes that the exam process is intended to help staff understand the adviser’s business, operations, investment activities, and compliance program. Equally as important, the Division said that its interviews and other examination procedures are intended “to assist the staff in assessing the adviser’s tone at the top and culture of compliance,” which are “important factors in the staff’s review of the effectiveness of the adviser’s compliance program.” The message for new registrants in the alert is about ensuring they are on the path of compliance the SEC wants to see going forward. Bates will keep you apprised.
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