Earlier this year, IA Watch conducted an extensive video interview with Drew Bowden who is the director of the SEC Office of Compliance Inspections and Examinations (OCIE). The OCIE is the division within the SEC that conducts investment adviser regulatory examinations. The full interview is split into five segments. In each segment, Mr. Bowden reveals a number of compliance and regulatory insights that are highly relevant to SEC registered investment adviser (RIA) firms. Below is a recap of the first segment.
This first segment is primarily focused on the topic of risk assessments that the SEC conducts internally to help identify potential high-risk RIA firms that should be prioritized for examination. On the topic of risk assessments, Mr. Bowden notes “the majority of examinations that we do are based upon our own risk analysis.” He goes on to state that “we do risk assessments of advisers to try to identify advisers who exhibit characteristics that in our experience we found tend to either create risk or create harm to investors.” In regards to the types of risk analysis performed by the SEC that can increase the risk of an audit, Mr. Bowden provides two examples:
- A firm that has recently grown or shrunk considerably
- High frequency of staff turnover
To conduct this analysis, Mr. Bowden notes that the agency will review Form ADV and Form PF filings, utilize third-party databases, monitor the news, and also see when the advisory firm was last examined. He also stresses that firms may be examined due to a complaint or because the RIA firm is engaged in activity that the SEC simply wants to study and learn more about. In other words, the SEC does not conduct all examinations due to a potential “red flag.”
Mr. Bowden also stresses that he’d like to see the SEC continue to provide more transparency to RIA firms. He states, “the general rule of thumb is more transparency is helpful…it will help promote compliance.” As we’ve noted before, the SEC continues to make a concerted effort to provide more information and transparency when it comes to its RIA compliance areas of focus. Bowden does state that the SEC, as of now, has decided not to release the methodology powering its risks assessments but it’s possible that this stance could change over time.
The full video of part 1 IA Watch’s interview can be found on Youtube. Be sure check back soon for additional recaps on interview parts 2 through 5.