Common Deficiencies of Newly Registered Investment Advisers

April 14, 2023


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In a recent Risk Alert by U.S. Securities and Exchange Commission (“SEC”), the Examination Division identified several common issues among newly registered investment advisers (also referred as RIAs): (1) compliance policies and procedures; (2) disclosures and filings; and (3) marketing. Although these findings are based upon examinations of federally registered investment advisers, it’s our experience that newly state registered firms have similar issues.

SEC-Proposes-Amendements-to-Form-PF

Compliance Policies & Procedures

The SEC staff made the following observations about the compliance policies and procedures (also referred to as a compliance manual) of newly registered investment advisers:

  • Risk – areas of risk applicable to the firm, such as portfolio management and fee billing, are not adequately addressed by the compliance policies and procedures;
  • Enforcement – the compliance policies do not include procedures to enforce stated policies, such as stating the adviser’s policy is to seek best execution, but not having any procedures to evaluate periodically and systematically the execution quality of the broker-dealers executing their clients’ transactions; and
  • Not Followed – the compliance policies and procedures were not followed by the firm’s supervised persons because not aware of the P&P or the P&P were not consistent with their business or operations; and
  • Annual Review – the annual review of the compliance policies and procedures and their implementation did not address certain inadequacies such as the following:
    • Not Customized – compliance policies & procedures not tailored to investment adviser firm’s operation and business
    • Insufficient Resources – the chief compliance officer (“CCO”) did not have adequate time or resources to ensure compliance with regulatory requirements and compliance policies and procedures;
    • Conflicts of Interest – the investment adviser firm had undisclosed conflicts of interest created by individuals with multiple roles which weren’t mitigated;
    • Inadequate Supervision of Outsourcing – certain business and compliance functions were outsourced without assessing how such functions were being performed and whether consistent with compliance policies and procedures; and
    • Inadequate Business Continuity and Succession Plan – the compliance policies and procedures lacked an adequate business continuity and succession plan.

Disclosures & Filings

The SEC staff observed disclosure documents (e.g., Form ADV) contained omissions or inaccuracies and were not updated timely (i.e., material or annual updates were not made by required deadlines). The Risk Alert categorized the most common disclosure omissions and inaccuracies by newly registered investment advisers as follows:

  • Fees and compensation;
  • Number of clients and assets under management;
  • Services offered to clients including investment strategy, use of models, aggregate trading and account reviews;
  • Disciplinary information;
  • Websites and social media accounts; and
  • Conflicts of interest.

Marketing Materials

Based upon the exams of newly registered investment advisers, the SEC observed marketing materials with false or misleading information such as the following:

  • Experience and credentials of the firm’s supervised persons;
  • Third-party rankings; and
  • Investment performance claims.

We’d encourgae new SEC and state-registered investment advisers to study in detail this Risk Alert, “Observations from Examinations of Newly-Registered Advisers,” which is available for download at https://www.sec.gov/files/risk-alert-newly-registered-ias-032723.pdf.

Our Annual Compliance Program

If your investment adviser firm is newly registered and would like help in building a compliance program and assessing its effectiveness, RIA Compliance Consultants offers several different annual compliance program packages which can be viewed at https://www.ria-compliance-consultants.com/ria-compliance-services/annual_compliance_program_investment_advisor/. You may schedule a complimentary introductory call with our Business Development Team through our online calendar or by calling 877-345-4034.

Related Posts

The following are previous posts or webpages of RIA Compliance Consultants, Inc. related directly or indirectly to the topics discussed in this blog post.

Related Resources

The following are services, webinars and/or sample documents of RIA Compliance Consultants to assist a newly registered investment adviser:

General Disclosure

The information contained in this blog post is general in nature intended for educational purposes only and is not intended to be a comprehensive analysis of this topic. Investment adviser examinations by a securities regulator are not limited to the issues listed above. This post is not intended to constitute compliance consulting advice or apply to any particular investment adviser firm’s specific situation. Please consult the applicable securities regulator’s rules and published guidelines for more details about the topics referenced above. For more information about the limitations of this blog post and information on our website, please see our Disclosures webpage.

Posted by RCC
Labels: Examination, Newly-Registered Investment Advisers, Risk Alert, SEC, SEC Inspection
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