Author: Ian Meiksins
In FY 2019, the SEC conducted 2,180 examinations of Investment Advisors which is approximately 15% of all federally registered advisors. Yet, in their 2020 examination priorities, the SEC and Chairman Jay Clayton expressed concern that as the market for Investment Advisors continues to grow, they do not currently have the support or staff to cover the expanding industry.
Despite Chairman Clayton and the SEC’s fear of insufficient resources in the growing industry, RIAs remained largely in the focus of the SEC with the release of the 2020 Examination Priorities. Several consistent priorities have been emphasized by the SEC for the past few years including;
- Protecting retail investors, seniors and individuals saving for retirement
- Never before and not recently examined RIAs
- Compliance Programs
The SEC will continue to focus on RIAs that largely serve retail investors or individuals. Its reviews likely will focus on the sales practices of Advisors to retail investors and the suitability of recommendations related to Mutual Funds and ETFs. In particular, Mutual Fund share class selection and the financial incentives that may influence advisors to recommend higher-fee share classes will likely be closely reviewed by the SEC staff.
Never Before Examined RIAs
RIAs who have not had an SEC examination will continue to be highlighted by the Agency. In our experience, New Registrant Exams focus on the compliance program and ensuring adequate policies, procedures and resources have been allocated for the RIA. In recent years, it has been more common for the SEC to examine an SEC-registered Advisor within 12-24 months of the advisor being declared effective.
Cybersecurity continues to be a highly scrutinized and discussed topic by compliance officers, and for good reason, as the SEC has made it a priority for examinations the past several years. This will continue in 2020 as the SEC prioritizes information security including, “…(1) governance and risk management; (2) access controls; (3) data loss prevention; (4) vendor management; (5) training; and (6) incident response and resiliency.” We expect cybersecurity to remain a top concern for RIAs, broker-dealers and other financial services firms for the foreseeable future, since these institutions are a top target for malicious scams and hackers.
While the SEC carried over the bulk of its priorities from 2019, it did expand and add to several areas. In particular, the SEC continues to focus on digital assets and Electronic Advice (Robo-Advisors).
Digital assets rise to prominence has been much slower in the world of RIAs but has enough momentum for the SEC to focus on advisors who may be recommending or buying such assets for clients. Its reviews will look at suitability of clients, trading, custody of the assets and valuation methods, among other items. Advisors who use digital assets in client portfolios should ensure they have clear, thorough policies and procedures around those assets.
Electronic Advice (Robo-Advisors)
Robo-advisors continue to be a major interest of both the SEC and RIAs. RIAs drawn to robo-advising may see a way to provide advice to smaller accounts without increasing their operations. The SEC, however, is concerned with, “(1) SEC registration eligibility, (2) cybersecurity policies and procedures, (3) marketing practices, (4) adherence to fiduciary duty, including adequacy of disclosures, and (5) effectiveness of compliance programs.”
Finally, one of the largest and most impactful new items on the 2020 priorities list comes from the adoption of the 2019 Regulation Best Interest. While these regulations may have less impact on the RIA community, advisors should be ready to discuss all the policies and procedures they’ve put in place to address conflicts of interest and the delivery of the new Form CRS.
For a full list and overview of the SEC’s 2020 Examination Priorities, please visit: https://www.sec.gov/about/offices/ocie/national-examination-program-priorities-2020.pdf
For help in preparing for an SEC examination, please contact Key Bridge Compliance, LLC at keybridgecompliance.com or by sending us an email at firstname.lastname@example.org