On September 6, 2023, the SEC’s Division of Examinations staff issued a risk alert that shed light on the risk-based approach they utilize in selecting registered investment advisers for examination. The approach, according to the staff, is not stagnant but dynamic, continuously adapting to market conditions, industry practices and investor preferences.
The alert offers valuable insights into the elements that factor into the staff’s decision-making process. With the considerable size and variety of advisers, any could be chosen for inspection based on the SEC’s risk-based algorithm. This approach allows the agency to focus their resources effectively and comprehensively assess potential risks to investors.
An understanding of the staff’s selection process is vitally important for registered investment advisers. While no specific criteria guarantees exemption from examination, awareness of the risk-based approach could potentially assist advisers in their regulatory compliance efforts and preparedness for potential inspections.
Though the full details of this risk-based approach are proprietary to the SEC, the fundamental factors driving this approach shed light on the methodology and goals driving the SEC’s Division of Examinations. This information is crucial for legal professionals, particularly those advising registered investment advisers, as understanding the SEC’s operational processes can aid in best practice compliance strategies and risk management efforts.