INVESTMENT ADVISERS—SEC issues Risk Alert on observations from examinations of newly-registered advisers - 05 April 2023

The SEC’s review of recent newly-registered adviser examinations identified issues in compliance policies and procedures, disclosure documents and filings, and marketing.

The SEC’s Division of Examinations issued a Risk Alert discussing the focus areas reviewed during examinations of newly-registered advisers and sharing staff observations regarding compliance policies and procedures, disclosures, and marketing practices. Examinations of newly-registered advisers provide an opportunity for early engagement between advisers and the staff and assist firms in their compliance efforts.

Examinations. The Division’s examinations of newly-registered advisers often focus on whether the firms have: (1) identified and addressed conflicts of interest; (2) provided clients with full and fair disclosure such that clients can provide informed consent; and (3) adopted effective compliance programs.

The examinations typically involve document requests and interviews with advisory personnel addressing the adviser’s: (1) business and investment activities; (2) organizational affiliations; (3) compliance policies and procedures; and (4) disclosures to clients. The staff requests information and documents for a defined review period to assess the adviser’s compliance with the Advisers Act and to determine whether the adviser’s representations and disclosures made to clients and in SEC filings are consistent with the adviser’s actual practices.

Observations. The staff’s review of recent newly-registered adviser examinations identified issues in the following three areas: (1) compliance policies and procedures; (2) disclosure documents and filings; and (3) marketing.

Compliance policies and procedures. The staff observed compliance policies and procedures that: (1) did not adequately address certain risk areas applicable to the firm, such as portfolio management and fee billing; (2) omitted procedures to enforce stated policies, such as stating the advisers’ policy is to seek best execution, but not having any procedures to evaluate periodically and systematically the execution quality of the broker-dealers executing their clients’ transactions; and/or (3) were not followed by advisory personnel, typically because the personnel were not aware of the policies or procedures or the policies or procedures were not consistent with their businesses or operations.

Disclosures. The staff observed required disclosure documents that contained omissions or inaccurate information and untimely filings. The disclosure omissions and inaccuracies were related to advisers’: (1) fees and compensation; (2) business or operations (including affiliates, other relationships, number of clients, and assets under management); (3) services offered to clients, such as disclosure regarding advisers’ investment strategy, aggregate trading, and account reviews; (4) disciplinary information; (5) websites and social media accounts; and (6) conflicts of interest.

Marketing. The staff observed adviser marketing materials that appeared to contain false or misleading information, including inaccurate information about advisory personnel professional experience or credentials, third-party rankings, and performance.

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