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SEC Issues Risk Alert Detailing Why a Firm May Be Targeted for Examination

SEC Issues Risk Alert Detailing Why a Firm May Be Targeted for Examination. Adviser, broker, broker-dealer, financial services, investment adviser, RIA

The Securities and Exchange Commission’s Examinations Division published a new risk alert yesterday that details reasons why a firm may be selected for an SEC exam, and the documents that may be requested.

Reasons the division may select an advisor for examination include, but are not limited to:

  • the firm’s risk characteristics
  • a tip, complaint, or referral
  • the staff’s interest in a particular compliance risk area.

When selecting advisers to examine, the Division considers factors such as which advisers provide services, recommend products, or otherwise meet criteria relevant to the focus areas described in the Division’s priorities.

The SEC-registered investment adviser population is large and diverse, ranging from global asset managers to small firms, engaging in a variety of business activities (e.g., advisory, brokerage, and insurance), servicing a diverse client base (e.g., individuals, trusts, investment companies, private funds, and pension plans), and managing a wide spectrum of assets under management (“AUM”).

The SEC says that given the size and variety of the adviser population, the Division utilizes a risk-based approach for both selecting advisers to examine and in determining the scope of risk areas to examine.

There are also firm-specific risk factors that the staff considers when selecting advisers for examination, such as those related to a particular adviser’s business activities, conflicts of interest, and regulatory history.

Additionally, the alert lists what the agency will request in exams, “including documents that staff may request and review during a typical examination of an advisor that does not engage in additional activities and/or have additional relationships (e.g., manage private funds).”

The requests are generally transmitted through secure email, and responses are also typically provided electronically. If certain records are not maintained electronically or cannot be produced electronically, the staff may request that the advisor make such records available for in-person examination.

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