Would Your Registered Investment Adviser be Prepared for a Regulatory Exam?

August 30, 2011

Reading time : 4 minutes

With the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), mid-sized investment adviser firms (firms with assets under management between $25 million and $100 million in assets under management) will now be required to switch from federal to state regulation.  One of the anticipated outcomes resulting from this change that should be notice by all registered investment advisers is more frequent regulatory examinations.  As stated by the North American Securities Administration Association (“NASAA”), “Firms switching to state regulation for the first time can expect thorough inspections generally on a more frequent basis than they may have had experienced before. Most advisers should find that thorough inspections and strong internal compliance benefit customer and firm alike.”  Additionally, in a study conducted by the staff of the U.S. Securities and Exchange Commission (“SEC”) under the requirements of Section 914 of the Dodd-Frank Act, released January, 2011, it was indicated that, “The Staff expects that the frequency of examinations of registered investment advisers could increase following the effective date of Title IV as a result of a substantial decrease in the number of registered investment advisers, many of whom will transition from federal to state registration.”

An SEC or state investment adviser examination can be conducted as an announced exam, where the investment adviser receives prior notice of the examination (generally only one or two weeks notice) or as a surprise exam, where the regulatory examiners show-up unannounced to conduct the examination.  The time for an investment adviser to prepare for a regulatory examination is not when the examination notice is received or when the state or SEC examiners arrive to conduct the examination.  All registered investment advisers should be continuously prepared and in a constant state of readiness for a regulatory exam.  Some of the things to consider when determining if your registered investment adviser is prepared for an examination are:

  • Is your investment adviser aware of and can it “promptly” provide all of the documents routinely requested during an SEC or state examination?
  • Are your investment adviser’s policies and procedures current and have they been customized to the specific facts and circumstances of your investment adviser?  Are they written to prevent, detect, and correct violations of the Investment Advisers Act of 1940 or, if applicable, similar state rules and regulations and to address all identified areas of risk specific to your investment adviser?
  • Do your investment adviser’s Chief Compliance Officer and other staff members know their roles during the regulatory examination process?  Do they know what to do and how to act if an SEC or state examiner arrives to audit your investment adviser?
  • Is your investment adviser prepared to demonstrate how it has enforced a strong culture of compliance throughout the firm?

If you would like more information to help you determine your investment adviser’s readiness for a regulatory exam, RIA Compliance Consultants is hosting a webinar, “Preparing for a Regulatory Exam,” presented by one of our Senior Compliance Consultants on Thursday, September 15, 2011 from 12:00 pm – 1:00 pm Central.  During this webinar, one of our Senior Compliance Consultants will give you an overview of the examination process along with some guidance and tips for preparing for and surviving a regulatory exam.  The webinar will last approximately 60 minutes can be purchased for a fee of $59.95.  To register for this webinar now click here.

To speak with RIA Compliance Consultants about the services we can provide to assist your investment adviser in assessing its readiness for a regulatory exam or any of your investment adviser’s other compliance needs, please click here to schedule a time to speak to one of our consultants.

Posted by Bryan Hill
Labels: Regulatory Inspections, SEC Inspection, Switch from SEC to State