On September 6th, the SEC issued a Risk Alert outlining its risk-based approach to examinations, selection process of firms to examine and document requests of registered investment advisor firms. Firms may be selected for an examination based on a tip, complaint, referral or the SEC’s interest in a particular compliance risk area. Among other criteria, the SEC may consider prior examination observations and conduct; supervisory concerns, such as disciplinary history; business activities of the firm or personnel; length of time since the firm was last examined; and material changes in a firm’s leadership or other personnel. The scope of the SEC’s exam and documents they request is based on the firm’s business model, associated risks and the reason for conducting the examination. Typically, exams include reviewing the firm’s operations, disclosures, conflicts of interest and compliance practices with respect to certain core areas, including custody, valuation, portfolio management, fees and expenses, brokerage and best execution. At the conclusion of this Risk Alert is an Attachment which is a typical list of information the examiners may request, which I encourage all to review.
