The Division of Examinations administers the Securities and Exchange Commission’s (“SEC”) nationwide examination and inspection program. Individual states generally have an examinations division that administers the inspection program. Many states follow the majority of the North American Securities Administrators Association (“NASAA”) model rules.
These programs are designed to detect fraud and other violations of the securities laws, foster a culture of compliance, and ensure that the SEC is continually informed of developments and areas of potential risk related to investment advisory firms. Continue reading to learn about the three most common types of audits that an RIA Firm can undergo.
According to Section 204 of the Investment Advisers Act of 1940:
All records (as so defined) of such investment advisers are subject at any time, or from time to time, to such reasonable periodic, special, or other examinations by representatives of the Commission as the Commission deems necessary or appropriate in the public interest or for the protection of investors.
In other words, the SEC and state regulators can audit your RIA firm at any time, for any reason, announced or unannounced. These examination programs play a critical role in ensuring a culture of compliance with the rules and regulations of the RIA industry.
Generally, there are three types of in-office RIA compliance examinations:
1. Routine Inspections
These are periodic, routine examinations, which are conducted to determine if investment advisory firms have the appropriate systems and controls in place in accordance with the current rules and regulations. Examiners also focus on how the policies and procedures are actually being carried out by the firm on a daily basis, while making the required disclosures to clients. Firm’s can expect examiners to compare the execution of operational and compliance practices to the information outlined in their Form ADV.
Routine inspections are detailed and comprehensive. Depending on the size and complexity of the RIA firm, the length of the inspection can last for a day or several weeks. These audits often occur within the first year of an RIA firm’s registration, and can sometimes be unannounced.
2. For Cause Inspections
As the title suggests, these inspections occur as a result of particular developments such as a client complaint or internal inquiry. These are typically unannounced examinations.
3. Sweep Examinations
Sweep examinations are conducted to gather information on the RIA firm’s practice. The examiners typically focus on specific areas, such as advertising, custody, soft dollar arrangements, etc. These are also often surprise examinations.
It is common for most SEC and state-level RIA audits to be announced in advance to the RIA firm. However, many states frequently perform unannounced examinations in their respective jurisdictions.
RIA firms can expect the announcement to be delivered via email, letter, and/or fax, and likely contain the
following information:
- Notification that the state or SEC is conducting an examination of the RIA firm, and the purpose of the examination is to assess your compliance with provisions of the Advisers Act.
- A document request list for you to provide and submit to the state or SEC to be reviewed prior to the
on-site exam. This list will be included in the letter, and the examiner will review these items before
coming to your office. - Lastly, the letter will identify the date of the examination. The expectation is that you will cooperate fully during this process and in the case of an on-site examination, the firm will need to make adequate office facilities available to the staff during the on-site examination to ensure the efficiency of the examination.
For more information on how to prepare for an audit, read our blog post, What to Expect When Your RIA Firm is Going to Be Audited.
We highly recommend for RIA firms to take great care of responding to the document request list as instructed, because that is the true beginning of the RIA compliance examination. Starting off on the right foot will help set the tone for the entire audit process.
