SEC Staff Reviews IA Exam Selection and Process

In its latest Risk Alert, SEC staff reviewed its process for selecting investment advisers for examination, the likely focus of an examination and the types of information examiners may request.

The Division of Examinations said that an adviser may be examined based on a variety of factors, including: prior examination observations and conduct, supervisory concerns, tips or complaints regarding an adviser, personnel or leadership changes, indications of financial or market stress, press coverage, information provided by third-party data services, an adviser's disclosure history or compliance concerns regarding access to client assets.

The scope of an examination depends on the areas of an adviser's business that will be examined, which also determines the types of documents that will be requested. The Division stated that, generally, examination staff will review operations, disclosures, conflicts of interest and compliance practices regarding the (i) custody and safekeeping of client assets, (ii) valuation and portfolio management, (iii) fees and expenses and (iv) brokerage and best execution. The Division stated that advisers will typically receive an initial request leading up to an examination which lists the documents that will be requested from the adviser. The Division appended a checklist of "the types of initial information, including documents, that staff may request and review during a typical examination of an adviser that does not engage in additional activities and/or have additional relationships (e.g., manage private funds)."