On March 27, 2023, the SEC’s Division of Examinations issued a risk alert relating to examinations of newly registered investment advisers. Noting that conducting examinations of newly registered advisers has been a stated examination priority since 2013, the staff issued the risk alert to discuss the typical areas of focus in examinations of newly registered advisers as well as certain observations from those examinations.

The staff stated that examinations of newly registered advisers allow for early engagement between the staff and advisers, permitting the staff to provide information about the examination program, conduct preliminary risk assessments, discuss the advisers’ operations and risks and promote compliance. The staff stated that examinations frequently focus on whether newly registered advisers have identified and addressed conflicts of interest, whether they have provided full and fair disclosure to clients that allow clients to provide informed consent and whether they have adopted effective compliance policies and procedures. The risk alert included a description of the scope of an examination of a newly registered adviser, noting that the examination typically focuses on (1) general information about the adviser’s business and operations; (2) demographic and other information about client accounts; (3) information about the adviser’s compliance program, risk management practices and internal controls; (4) information to allow the staff to test for compliance in areas such as portfolio management and trading; and (5) communications the adviser uses to inform or solicit new or and existing clients.

The risk alert also includes a summary of staff observations from examinations of newly registered advisers, including the following:

• The staff observed newly registered advisers with compliance policies and procedures that did not adequately address sources of risk to the firm, such as portfolio management and fee billing; that failed to include procedures to enforce certain policies (e.g., a policy to seek best execution without procedures to evaluate the quality of trade execution); and that were not followed by advisory personnel due either to a lack of awareness or to an inconsistency between stated policies and procedures and the firm’s actual business practices and operations.
• The staff observed advisers that performed annual compliance reviews that did not address the adequacy of compliance policies and procedures or their effectiveness of implementation. In this regard, the staff noted (1) advisers with off-the-shelf compliance manuals not tailored to their particular businesses; (2) advisers that devoted insufficient resources to the compliance function; (3) advisers with undisclosed and unmitigated conflicts of interest relating to advisory personnel with multiple roles and responsibilities; (4) advisers that performed inadequate oversight of outsourced functions; and (5) advisers without business continuity plans or succession plans.
• The staff observed advisers with disclosure documents that included misstatements or omissions and that were untimely filed and updated. These included disclosures about advisers’ fees and compensation, business and operations, investment strategies, trading practices, account reviews, disciplinary history, websites and social media accounts, and conflicts of interest.
• The staff observed advisers with marketing materials that appeared to include materially false or misleading information, including with respect to the experience and credentials of advisory personnel, third-party rankings and performance. The staff also observed advisers that could not substantiate factual claims in marketing materials.

The risk alert is available here.