Risk Alert: Assessing Risks, Scoping Examinations, and Requesting Documents

On Wednesday, September 6, 2023, the U.S. Securities and Exchange Commission Division of Examinations released a Risk Alert detailing the Division’s examination selection process. For those of you already familiar with this process, the alert didn’t add much in terms of new intel. 

The alert also included additional information detailing the staff’s typical initial request for documents and information. The alert was issued in hopes of providing valuable information to help advisers prepare themselves for the inevitable examination and assist firms in their compliance efforts. We suspect the SEC is doing this for those unfamiliar with the examination process.

When selecting a firm to examine, the Division may select an adviser based on a tip, complaint, or referral. The staff may also initiate an exam because there is an interest in a particular compliance risk area.

Every year the Division publishes its annual exam priorities to provide advisers with insight regarding the focus areas that they believe to be potential risks to investors, including certain products, services, business operations, or practices. The Division also considers factors including for example, which advisers provide services, recommend products, or otherwise meet criteria relevant to the focus areas described in the annual exam priorities.

In this alert, the Division identified the usual firm-specific risk factors that they consider when selecting advisers for examinations.

  • prior examination observations and conduct;
  • supervisory concerns, such as disciplinary history of associated individuals or affiliates;
  • tips, complaints, or referrals involving the firm;
  • business activities of the firm or its personnel that may create conflicts of interest;
  • the length of time since the firm’s registration or last examination;
  • material changes in a firm’s leadership or other personnel;
  • indications that the adviser might be vulnerable to financial or market stresses;
  • reporting by news and media that may involve or impact the firm;
  • data provided by certain third-party data services;
  • the disclosure history of the firm; and
  • whether the firm has access to client and investor assets and/or presents certain gatekeeper or service provider compliance risks.

Upon selecting an adviser for an examination, the SEC will conduct an additional risk assessment to determine the scope of the upcoming examination. The scope of an examination will vary depending on the firm’s business model, associated risks, and the reason for conducting the examination.

As part of the examination process, the SEC will usually send advisers a letter notifying them of the upcoming examination, which also includes the initial request list. The initial request list typically includes:

  • general information;
  • information about the compliance risks that the adviser has identified and the written policies and procedures the firm has adopted and implemented to address each of those risks;
  • information to facilitate testing with respect to advisory trading activities; and
  • information for the staff to perform its own testing for compliance in various areas.

SEC³ can assist with navigating you through your next regulatory examination. From the moment the SEC first notifies you of your upcoming examination, our team of experienced compliance professionals will support you with the preparation and oversight from start to finish.

For more information, please contact us at info@sec3ccompliance.com, at (212) 706-4029 x 229, through LinkedIn or visit us on our website at www.sec3compliance.com.

Risk Alert: Assessing Risks, Scoping Examinations, and Requesting Documents