Regulatory Examination Priorities & Insights

Regulatory Examination Priorities & Insights

Have you been through a regulatory examination recently? If not, take heed, your time might be coming. Without even looking at the SEC 2021 statistics on the number of regulatory examinations completed, we can tell you that it has been a very busy year for the Division of Examinations.

The SEC’s 2020 Examination statistics reveal the Division of Examinations conducted almost 3,000 exams, covering 15% of the adviser population. The total number of examinations was down only 4% from 2019, and this is during the ongoing COVID-19 pandemic! The notion that maybe you are not going to be examined because of the COVID pandemic simply isn’t playing out.

The examiners have pivoted from in-person examinations to remote, which seems to result in examinations lasting longer than before. Deadlines for document production seem to be consistent with in-person exams, however the follow-up for review and discussions is taking longer. As a result, investment advisers should plan for their regulatory exams to last months, with periods of inactivity.

In addition to publishing examination statistics, the SEC also publishes its annual list of exam priorities. Publishing these areas of focus furthers the SEC’s mission of promoting transparency on expectations, but also helps ensure consistent exams regardless of which office is conducting the exam. In comparing the SEC’s 2021 Examination Priorities, we can confirm that examiners are taking these to heart and are using them as a blueprint for exams for our clients.

While there are plenty of analyses of these priorities on their own, we wanted to talk about how we are seeing them come to fruition:

  • Fees, especially advisory fees, are a hot topic. Examiners are taking a hard look at fees charged, comparing to advisory agreements, and ensuring proper disclosure is made. Are you fully disclosing your fees and other compensation arrangements?
  • Speaking of disclosure, have you reviewed your Form CRS since implementing it last year? Advisers had to adopt and submit their Form CRS by June 30, 2020, yet have you reviewed changes to your business which would trigger revisions to Form CRS?

And it wouldn’t be an examination priority list without the inclusion of cybersecurity, which marks almost a decade of annual inclusion. We feel it is worthy of mentioning that in Chairman Gensler’s comments to the United States Senate on September 14th, 2021  he highlighted the SEC’s mid-year agenda by saying the Commission is focused on proposing a cybersecurity rule at some point in the near future. The proposed rule would cover specific systems advisers should have in place, as well as how firms should manage their digital risks. Additionally, the proposed rule would address requirements for how advisers manage post breaches or similar incidents.

In our experience, most advisers and information technology professionals would welcome such standardized system requirements. Presently, the guidance from regulators is focused on subjective topics such as examples of best practices. Best practices are helpful, however firms can struggle with specific implementation, so having specifics laid out by the SEC would provide the guidance firms need.

Are you a newly registered investment adviser? If so, expect an examination within the first 6-8 months of opening your doors. Initially, we were seeing the new registrant examinations within 12 months of a firm receiving their provisional approval. However, now we are seeing the SEC start an exam as early as 3 months since registering. The takeaway being that you need to ensure you have a reasonably designed compliance program in effect as soon as you open your doors.

There are also new items being included on the initial document request letter from the SEC. Based on these new requests, it is very apparent the examiners want technology to be a big aspect of an Advisers’ compliance program. In a recent document request, the SEC requested a trade blotter for the past two year of all trades effected in not just client accounts, but also accounts of the Adviser’s Access Persons. Additionally, the initial document request letter included a request for a list of investments held by the Adviser’s clients, any private funds under management and each of the Adviser’s owners, senior officer and portfolio manager.  

If your compliance department does not have an automated Code of Ethics reporting system, responding to these types of requests might be very challenging or even electronically impossible. For Advisers that still receive manual statements from their Access Persons for Code of Ethics reporting, providing the information requested by the SEC in this fashion would be nearly impossible.

As noted earlier, there is also a significant focus on advisory fees and compensation arrangements, particularly around sub-advisors and independent third party managers. In recent examinations, there has been great attention paid to fee billing on household accounts, pro-rated refunds for terminated accounts and the disclosure of sub-advisory fee arrangements. So, what are the takeaways from all this? Get your affairs in order and prepare your firm for an examination. Create a first-day presentation that describes your firm, its compliance program, compliance resources and technology in place. Test your fee billing practices and ensure calculations are accurate and disclosure is consistent with your practices. Even better, consider going through a mock SEC examination to test your preparedness.

For more information or to speak with a regulatory expert, please email