Exam Risk Alert
On September 6, 2023, the SEC’s Division of Examinations (Division) issued a risk alert outlining its risk-based approach to selecting advisers for examination and determining focus areas of such examinations. The risk alert can be found here.
With respect to adviser selection, the alert notes the Division’s focus on: (i) prior examination observations and conduct; (ii) supervisory concerns (e.g., disciplinary history); (iii) tips, complaints or referrals involving the adviser; (iv) business activities of the adviser or its personnel that may create conflicts of interest; (v) the length of time since the adviser’s registration with the SEC or last examination by the Division; (vi) material changes in the adviser’s leadership or key personnel; (vii) indications of the adviser’s vulnerability to financial or market stresses; (viii) news or media reports concerning the adviser; (ix) information received from certain third-party data services regarding the adviser; (x) the adviser’s disclosure history; and (xi) the adviser’s access to client or investor assets or indications of gatekeeper or service provider compliance risks.
The alert further details how the Division determines the scope of a selected adviser’s examination and the related document request, noting that such processes are specific to, and based on the business model, associated risks and reason for examination of, each adviser. While each examination is unique, the alert describes certain commonly-examined focus areas (e.g., an adviser’s operations, disclosures, conflicts of interest, and compliance practices), specifically as these areas pertain to topics such as custody, valuation, portfolio management, fees and expenses and brokerage and best execution. Additionally, the Division appended a sample “typical initial request for documents and information” to the alert, noting such materials primarily relate to an adviser’s general business, compliance policies and procedures, trading activities and “information for the staff to perform its own testing for compliance in various areas.”
Marketing Rule Violations
Separately, on September 11, 2023, the SEC announced that it had settled charges against nine investment advisers for publicly advertising hypothetical performance on their websites without adopting and/or implementing policies and procedures reasonably designed to ensure that such performance was relevant to the likely financial situation and investment objectives of the advertisements’ intended audiences, as required by amended Rule 206(4)-1 (Marketing Rule) under the Investment Advisers Act of 1940. Two of the advisers were additionally charged with failing to maintain copies of advertisements as required by the Act’s books and records rule.
As part of their settlements, each of the advisers agreed to pay civil penalties ranging from $50,000 to $175,000. The SEC’s announcement can be found here.