The Securities and Exchange Commission (SEC) put forth a risk alert on September 6, 2023 about the selection and scope of SEC-registered investment adviser examinations. The Division of Examinations, a section within the SEC, made it known that they utilize a risk-based approach to both choose the investment advisors under their purview, as well as determining which areas of risk require examination. This approach is consistent with previous advisories issued by the Division. The alert will be of particular interest to existing RIAs, as well as emergent managers and clients and sponsors who have been subjected to examination previously. More details can be found here.
This risk-based approach involves identifying higher risk areas in an incorporated firm’s activities, processes, and procedures in which to focus their examination. This evaluation strategy enables them to conduct both limited and comprehensive inspections, with their assessments directly influencing their subsequent inspection approach.
A notable aspect of the Division’s methods involves the selection of RIAs for examination. The process isn’t arbitrary, instead, it involves analyzing a number of risk factors. These encompass a firm’s history of compliance, the nature and complexity of a firm’s products, services or operations, among others.
Therefore, it is crucial for both well-established firms and those entering the sector to closely follow the criteria set out by the SEC, to ensure they are prepared for possible examination and are adequately mitigating any potential areas of risk.