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What to Expect During an SEC Examination of an RIA Firm?

The U.S. Securities and Exchange Commission (SEC) Division of Examinations (formerly known as the Office of Compliance Inspections and Examinations), is responsible for examining registered investment advisers (RIA), investment companies, and private funds.

In performing examinations, the SEC staff review disclosures, conflicts of interests, marketing, advertising, cybersecurity, business continuity, and other asset management priorities.  With almost 14,000 SEC-registered investment advisors, the Division of Examinations has over 1,000 employees.

Investment advisors and their staff should be mindful of the importance of participation in an in examination, whether it is a new registrant exam (usually performed by correspondence), or an on-site inspection.  Of course, in preparing for examinations, investment advisors should ensure that their compliance program (led by a well-trained Chief Compliance Officer) is properly reviewed and tested through mock exams and interaction with legal counsel.

How to Prepare

The management team and the Chief Compliance Officer should prepare well in advance of any announced examination by keeping meticulous records.  SEC staff also like to ensure that the Chief Compliance Officer maintains independent authority to take action, and is not simply a placeholder.  As such, it is important for the Chief Compliance Officer to maintain an adequate role within the company, and be present for the inspection.  In fact, other than counsel, the Chief Compliance Officer should be the primary interface with the SEC.

While communications within the RIA firm, and those with outside compliance consultants are not privileged, questions with legal counsel generally hold privilege.  The SEC generally recognizes attorney-client privilege claims for refusing to produce documents during an examination.  As such, members of the firm should be mindful that communications may need to be shared with the SEC, even if not flattering.  For example, an e-mail regarding NOT complying with the rules regarding client complaints could be used against the RIA firm if sent from an investment advisor representative to the Chief Compliance Officer.  However, a similar e-mail from the Chief Compliance Officer to legal counsel may not necessarily be discoverable by the SEC (and therefore not used directly against the firm).

Recent Key Exam Priorities

  • COVID-19 related business continuity
  • Monitoring employees who work from home
  • Digital Assets (e., cryptocurrency)
  • Retail Investors
  • ADV 3 / Form CRS Disclosures, Distribution, and Updates

McCabe & Ali, LLP’s securities practice covers a range of areas including securities fraud investigations, inquiries initiated by the SEC, FINRA, DOL, CFP® Board, and other state regulatory bodies.  Our experienced team has a combination of talent and government experience to help protect our client’s license and good name.

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