On Tuesday, March 8, 2016, the Securities and Exchange Commission (SEC) announced it has created a new office to help strengthen its registered investment adviser (RIA) examination capabilities. The new Office of Risk and Strategy will be housed within the agency’s Office of Compliance Inspections and Examinations (OCIE). This new office deemed by some industry observers as an elite unit will centralize the OCIE’s risk assessment, market surveillance, and quantitative analysis capabilities. In addition, the SEC notes that this new group will assist with risk management and general strategy for the OCIE.
The new Office of Risk and Strategy will be led Peter B. Driscoll who will serve as the new unit’s first Chief Risk and Strategy Officer.. Mr. Driscoll started his career at the SEC in 2001 as a staff attorney, later joined the OCIE in 2004, and has served as OCIE’s Managing Executive since 2013. in the agency’s Division of Enforcement. Marc Wyatt, the Director of OCIE, believes the new office “will lead the agency’s exam program’s risk-based, data-driven, and transparent approach to protecting investors.” It’s also important to note that the OCIE is the division at the SEC that manages the National Examination Program through audits of investment adviser firms.
The creation of this new office further highlights what many SEC staffers have previously stressed that just because only around 10% of SEC-registered RIA firms are audited in-person on annual basis, it does not mean that the agency is not conducting continuous remote analysis and risk targeting as it continues to gain access to additional data and analytical resources. The creation of this new office only serves to further highlight the significant resources the SEC OCIE is putting towards quantitative examination tools.
As RIA compliance consultants, we recommend that the Chief Compliance Officer of all federally-registered RIA firms continues to take proactive steps to ensure proper regulatory compliance including:
- Ensure that all Form ADV information, particularly related to the Form ADV Part 1, is completed accurately and regularly updated. Filing inconsistencies such as the total number of accounts disclosed being less than the total number of clients or the total number of employees at the firm not being in line with the total regulatory assets under management (AUM) for the firm are likely to receive increased scrutiny.
- Ensure that the Form ADV annual filing amendment is always filed on a timely basis and properly reflects any relevant changes.
- Ensure that all firm trading and employee personal securities transactions records are being regularly reviewed, monitored, and cross-referenced for potential issues.
- Ensure that the advisory fee being charged is reasonable and always matches all client documentation and agreements.
In particular, RIA firms that have experienced rapid growth should expect to receive additional scrutiny to determine whether the firm’s compliance policies and procedures have continued to scale with the increasing size of the firm.