SEC RISK ALERT: Observations from Examinations of Newly-Registered Advisers

On March 27, 2023, Staff from the SEC’s Division of Examinations published guidance stemming from examinations of newly registered investment advisers.  The Staff notes these advisers may face “unique compliance risks and issues.”  As noted in the Risk Alert, these examinations often focus on a firm’s adherence to its fiduciary duty, including specifically whether these firms have: (1) identified and addressed conflicts of interest; (2) provided clients with full and fair disclosure in a manner that allows clients to provide informed consent; and (3) adopted effective compliance programs.

The Risk Alert discusses the typical focus areas reviewed during examinations of newly registered advisers and shares observations around compliance policies and procedures, disclosures, and marketing practices.  The Risk Alert also describes the common scope for such examinations, which is designed to facilitate the Staff’s understanding of a newly registered adviser’s business.  For example, organizational charts, financial information, biographies of personnel, demographic information regarding client accounts, information about the adviser’s compliance program and marketing materials.

In its examinations the Staff observed newly registered advisers: (1) exhibited inadequate consideration of specific risk areas applicable to the firm, such as portfolio management and fee billing; (2) omitted procedures to enforce stated policies; (3) procedures were not followed by advisory personnel, typically because the personnel were not aware of the policies or procedures or the policies or procedures were not consistent with their businesses or operations.  This latter point underscores the need for staff training; (4) were using “off the shelf” compliance manuals that were not tailored to their business; (5) were not devoting sufficient resources to their compliance programs; (6) had not properly disclosed or mitigated conflicts of interest relating to its business; (7) outsourced certain business and compliance functions without proper vetting; and (8) were lacking adequate business continuity plans, including succession plans.

In its examination of newly registered advisers’ disclosure documents and filings, the Staff observed advisers’ required disclosure documents contained omissions or inaccurate information and untimely filings.

Finally, around marketing, the Staff observed during its examinations that adviser marketing materials appeared to contain false or misleading information, including inaccurate information about advisory personnel professional experience or credentials, third-party rankings, and performance.  In other cases, advisers were also not able to substantiate some of their factual claims.

This Risk Alert provides useful insights for newly registered advisers.  Attention to these areas will assist in experiencing a much better result from your first SEC examination and it is a credit to the Staff for sharing this information with the industry.