SEC exam trends: 5 areas of focus for RIAs

WHAT HAPPENED?

Although routine examinations may include requests related to any area of your firm’s operations, examiners may focus on certain compliance risks that have been identified or those itemized in a Risk Alert.

Staying up to date with SEC focus areas can give your compliance department an edge in preparing for a routine examination. Below are some key observations and areas of attention Fairview has identified regarding recent SEC exams and industry activity:

KEY OBSERVATIONS:

  1. Private fund investor side letters– During examinations of private fund advisers, OCIE staff have made frequent requests related to private fund side letters. As these documents can be tedious to track, requests have included calls for verification that agreements are being adhered to and periodically reviewed, as well as requests for documentation of side letter recordkeeping procedures.
  2. Form CRS– With the 2020 adoption of Form CRS, SEC staff has closely adhered to its plan set forth in their Form CRS Risk Alert, published on April 7. The SEC is working to ensure advisers servicing retail investors properly filed and delivered this document to new and existing clients. The form is required:
    • To have been posted to the IAPD by June 30, 2020
    • To have been delivered to existing retail investors on July 30, 2020
    • To have been delivered to new retail clients before or upon execution of an investment advisory agreement beginning July 30, 2020
    • To be provided to retail investor clients, upon request, within 30 days
    • To be amended and filed if any information becomes materially inaccurate within 30 days
    • To be delivered to existing retail clients if amended within 60 days

There are paper and electronic options for delivery of Form CRS. In some cases, advisers who have not complied have been contacted by the SEC.

  1. Policies and procedures to ensure the seven conditions are met for the custody exemption for standing letters of authorization (SLOAs)- For advisers subject to the Custody Rule who are relying on the exemption for SLOAs, examiners have emphasized that advisers must meet seven conditions as stated in the SEC’s 2017 no-action letter on the matter. Failure to meet the seven conditions will require the firm to undergo a surprise exam, carried out by a third-party audit firm. The seven conditions are as follows:
    • The client must sign a document directed to the custodian containing the third party’s account number or name and address
    • The client must authorize the adviser to direct transfers
    • The client may terminate or change instructions
    • The adviser must state and keep records that the third party is not related to or at the same address as the adviser
    • The client, not the adviser, must choose or change the third party’s information, such as its name or address
    • The client’s authorization must be verified by the custodian
    • The custodian must send the client written notice of an SLOA initially, annually, and upon each transfer
  1. Documented review of first- and third-party SLOAs- A documented review of first- and third-party SLOAs should:
    • Be completed periodically as part of the adviser’s compliance program
    • Evaluate the terms of individual SLOAs and how they are being adhered to, including how any supervised persons are determining compliance
    • Be retained as part of the adviser’s compliance books and records for a period of at least five years
  2. Advisory fee calculations and fees charged to advisory clients- Examiners are continuing to focus on how advisers calculate and charge fees to clients. SEC staff may request advisory agreements and related billing documentation to determine whether fee schedules are being adhered to. Arrangements that include fee minimums and fixed fees have been areas of special interest to examiners.

WHAT DOES THIS MEAN FOR ME?

If your firm has experienced recent organizational changes, has not been the subject of a routine examination in several years, or is newly registered, the SEC may initiate an exam of your firm at any time. Fairview will continue to update you with information about SEC exam trends, as it becomes available.

As part of our compliance support services, we offer comprehensive exam support for our clients. If you would like more information about how Fairview can assist your firm with its compliance program, or how our affiliate, Side Letter Vault, can help securely maintain and store your firm’s agreements, contact us today.

About the Author:

Fairview®
Founded in 2005 with the goal of developing streamlined solutions for investment advisers, Fairview® is now servicing investment advisers, foundations, and funds with nearly $300 billion in collective assets.