Understanding the SEC Risk-Based Approach

By Jeffrey Hiller

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The SEC’s Division of Examinations recently issued a Risk Alert, Investment Advisers: Assessing Risks, Scoping Examinations and Requesting Documents. The Alert is intended to assist advisers when preparing for an examination as well as establishing and maintaining an effective compliance program.

In this most recent Alert, the SEC explained, as they have in the past, that they use a risk-based assessment when selecting advisers to examine. Using a risk-based approach helps the SEC to determine the scope and risk areas to examine. Among other factors, the SEC considers the size of the firm, the type of clients the adviser serves, the type of assets the adviser manages and the number of assets under management. 

The SEC explained that the risk-based approach is dynamic, allowing them to react to changes in the market and newly introduced or popular products in the market. It also allows them to assess how registrants are adapting to new regulatory requirements. For example, the SEC issued new, comprehensive rules for marketing and advertising by advisers. This includes new rules related to how advisers can use testimonials in advertising. The new “Marketing Rule” provided specific criteria for advisers if they elect to use testimonials in their advertising. Recently, the SEC brought 17 actions against advisers for failing to follow the requirements of the new Rule. Another practice the SEC uses in their exams is to compare a registrant’s regulatory filings, such as the Form ADV, to their actual practices.

The SEC also attached to the Risk Alert a typical initial exam request for documents and information titled, Typical Initial Information Examiners request of Investment Advisers. Advisers should use the alert and this document when assessing their compliance program and when conducting the Annual Compliance Review required by Rule 206(4)-7. This will help them be prepared for their next SEC examination.

Ensuring your firm’s compliance program is current with evolving regulatory requirements is vital to protecting your business and reputation. Oyster Consulting will help your team conduct a risk assessment, then ensure your controls and procedures align with your firm’s policies and lines of business. Oyster’s compliance experts are former regulators, CCOs and compliance professionals. Our experts will collaborate with you, ensuring your program reflects your firm’s capabilities, leverages technology and has effective, streamlined processes.

About The Author
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Jeffrey Hiller

Jeffrey Hiller is an industry professional with over 25 years of experience, specializing in Investment Advisor services.  Prior to joining Oyster, Jeffrey was Chief Compliance Officer and Managing Director of Principal Global Investors where he created and managed the firm’s global compliance program. Jeffrey began his compliance career as Senior Counsel in the Securities and Exchange Commission’s Division of Enforcement in Washington, D.C.