The Securities and Exchange Commission (“SEC”) issued a Risk Alert on March 27, 2023, Observations from Examinations of Newly Registered Advisers. The Risk Alert focuses on the typical areas reviewed during examinations and shares staff observations regarding compliance policies and procedures, disclosures, and marketing practices. Overall, it is important for newly-registered investment advisers to have a strong compliance program in place and be aware of the areas that the SEC will focus on during its examinations. All new advisers should read it thoroughly and prepare to be examined by the SEC.
The SEC noted several areas of concern while conducting examinations of newly-registered investment advisers.
The staff observed compliance policies and procedures that:
- did not adequately address risk areas applicable to advisers;
- omitted procedures to enforce the written policies;
- were not followed by the advisers’ personnel because they were never communicated or they were operationally inconsistent; and
- were generic and not tailored and customized to their business.
Other critical takeaway observations included:
- Annual Reviews. Annual reviews failed to evaluate the effectiveness of the written compliance policies and procedures.
- Insufficient Resources. Advisers with insufficient resources dedicated to compliance. Specifically, the SEC noted advisers who did not have a designated Chief Compliance Officer (“CCO”) solely responsible for the administration of the compliance program.
- Undisclosed COI. The SEC identified undisclosed conflicts of interests stemming from personnel carrying out multiple roles and responsibilities with no proper ways of mitigating potential conflicts.
- Outsourcing. The SEC observed the outsourcing of certain business and compliance functions without the proper protocol for evaluating how the functions were performed and whether they were consistent with the advisers’ policies and procedures.
- Business Continuity Plans. The staff noted advisers who did not have adequate business continuity plans, including succession plans.
- Disclosure Documents and Filings. Incomplete or inaccurate information was often a concern in these examinations. Advisers were noted for failure to provide proper disclosures related to fees, advisers’ business, advisory services offered to clients, disciplinary information, websites and social media accounts, and other potential conflicts of interest. Additionally, the SEC observed untimely filings where annual and material updates were not submitted within the prescribed timeframes.
- Marketing. The staff noted advisers’ marketing materials that appeared to contain false or misleading information. They identified inaccurate information related to advisory personnel’s professional experience, credentials, third-party rankings, and performance. They also observed that some advisers were unable to back up certain claims they made in their marketing materials.
By taking the necessary steps today, newly registered investment advisers can protect themselves from costly enforcement actions down the road. For further guidance on best practices for newly-registered investment advisers, please contact SEC3.
SEC3 can assist you in developing a compliance program that is tailored to your firm’s business, while also meeting the SEC’s regulatory requirements. In addition, SEC3 leverages over 100 years of combined regulatory compliance experience to deliver compliance knowledge and insight that you can trust. SEC3 strives to develop effective partnerships, where our clients feel we are an extension of your firm rather than another service provider. We pride ourselves on our quality and service that is unmatched rather than adopting the typical client-consultant relationship.
Additionally, SEC3 has partnered with Orion Compliance (formerly BasisCode Compliance), an unaffiliated provider of a suite of robust compliance software solutions that are used by some of the world’s leading financial services, consulting, legal, accounting, fund administrators and broker-dealer organizations. SEC3 has developed a strong working relationship with Orion Compliance and offers a one-of-a-kind experience leveraging Orion Compliance’s strengths to streamline the monitoring and documenting of our clients’ compliance programs.
For more information, please contact us at info@seccc.com, at (212) 706-4029 x 229 or visit us on our website at www.seccc.com.
For over two decades, we have been providing compliance consulting services and servicing as outsourced Chief Compliance Officers. Our professionals have served as SEC regulators and in senior leadership, guiding the industry’s principal compliance association. Our consultants also have hands-on industry experience as chief compliance officers, experienced securities attorneys and senior management of investment advisers, broker-dealers and fund administrators.
What can SEC3 do for you?
SEC3 offers an extensive suite of customizable compliance services for investment advisers, private fund advisers, CPOs, CTAs, investment companies, institutional investors and broker-dealers which can complement your internal compliance program on a one-time or recurring basis depending on your needs.
Call us today at (212) 706-4029 x 229, or shoot us an email at info@SEC3compliance.com so we can set up a time for one of our consultants to discuss your needs and how we can help.
