Criminal Defense Lawyers

SEC Scrutiny of Investment Advisers: Examinations and Enforcement

SEC Scrutiny of Investment Advisers: What You Need to Know

The Securities and Exchange Commission (SEC) has been keeping a close eye on registered investment advisers (RIAs) lately. As an RIA myself, I want to give you the heads up on where the SEC is focusing its attention, so we can avoid any issues with the regulators.

What Areas is the SEC Prioritizing for Exams This Year?

The SEC recently put out its 2023 Examination Priorities, which gives us insight into what topics they’ll be scrutinizing more closely during RIA exams this year. Here are some of the big ones:

• Compliance with new rules for RIAs and investment companies
• Protection of retail investors
• Information security and operational resilience
• Private fund adviser compliance
• Environmental, social, and governance (ESG) investing

Specifically, they said they’ll be checking to see that RIAs are satisfying their obligations under Regulation Best Interest and the Advisers Act fiduciary standard when working with retail clients. They want to confirm we are truly acting in our clients’ best interests.

What Are Some Common Issues for New RIAs?

Lately, there’s been a surge in the number of new RIAs registering with the SEC. For many, this will be their first SEC exam. The SEC called out some typical problems they see with new RIAs:

• Inadequate compliance programs and resources
• Weak or no policies and procedures
• Deficient or misleading disclosures
• Unsuitable investments and trading practices
• Inaccurate performance advertising

As a new RIA, we need to ensure we have strong compliance programs in these areas before our first exam. Consider getting a mock SEC exam to test your compliance program.

What are the Most Frequent RIA Compliance Problems?

Based on deficiency letters the SEC sent after exams, some of the most common issues they cited were:

• Inadequate compliance policies and procedures
• Weak custody controls
• Insufficient disclosures about fees, costs, and conflicts of interest
• Unaddressed cybersecurity risks
• Misleading performance advertising
• Inadequate oversight of advisers acting as solicitors

Regularly reviewing our policies and procedures as our business evolves can help us avoid these types of problems.

What Are Some Typical RIA Enforcement Actions?

The SEC actively enforces securities laws and regulations against RIAs through administrative proceedings and lawsuits. Some of the most frequent enforcement actions include:

• Failure to adequately disclose conflicts of interest
• Misleading performance advertising
• Inadequate policies and procedures
• Custody rule violations
• Books and records failures

How Can RIAs Stay Out of Trouble?

Here are some best practices RIAs can follow to avoid issues with the SEC:

• Conduct annual compliance reviews to spot and fix regulatory gaps
• Stay updated on new SEC rules and guidance
• Review disclosures, advertising, and performance reporting for accuracy
• Get independent verification of performance advertising
• Evaluate conflicts of interest and consider if more disclosure is needed
• Maintain detailed compliance policies and procedures

By making compliance a priority, we show SEC examiners we take our regulatory duties seriously.

Why is Compliance So Important?

The risks of non-compliance go way beyond just exam deficiencies and enforcement actions. SEC investigations can be extremely disruptive and expensive. Additional costs may include:

• Legal fees
• Compliance consultant fees
• Lost management time
• Reputational damage and loss of clients
• Fines, disgorgement, and interest payments
• Restrictions on RIA activities or being barred from the industry

Avoiding these consequences gives us more reason to invest in continuous compliance.As the RIA industry grows, SEC oversight will likely keep expanding too. While SEC exams and enforcement can feel intimidating, being proactive about compliance can help us avoid regulatory pitfalls. By auditing and enhancing our compliance program, staying updated on changing SEC expectations, and carefully reviewing our disclosures and advertising, we can demonstrate our commitment to acting in our clients’ best interests.