Deciphering the selection criteria and focus areas of the SEC Division of Examinations for investment advisors can be a daunting task. On September 6, 2023, the Division issued a Risk Alert that lays bare its risk-based approach for selecting advisors to review, highlighting risks at individual firms, risks to investors and the wider market, and examining how advisors respond to fresh regulatory demands.
The comprehensive guide to the Division’s investigation strategy can be explored here.
This Risk Alert draws light not only on the Division’s process of selection, but also on what to expect during the course of examination. The review will target a broad array of areas, including:
- Portfolio Management: Implementations, processes and practices relating to investing and trading.
- Risk Assessment: Emphasis is on the functioning and adequacy of risk assessment procedures. This may involve the general risks assessed by the firm or those specifically mitigating the risks identified by Division.
- Corporate governance and Management: Studying the role of managers and directors, and their involvement in investment decision-making, risk assessment, and compliance mechanisms.
- Accuracy of Disclosures: Examining the truthfulness and completeness of information provided by the investment advisors to their clients.
After the examination, investment advisors can expect the Division to request additional documentation to assess any uncertain risks and to evaluate the firm’s regulatory compliance.
The Division’s Risk Alert goes a long way towards increasing transparency in their examination process. For investment advisors, this understanding is an essential first step in preparing for these examinations and abiding by new and evolving regulatory requirements.