On March 27, 2023, the SEC’s Division of Exams (“EXAMS”) published a risk alert on observations from examinations of newly-registered advisers. In the Risk Alert, EXAMS noted that it focuses on the following, among other things, when examining new registrants:

• General information on the firm’s business and operations, such as organizational charts and information about current and former employees;
• Data on each advisory client account, including about the advisory services provided, investment strategies, use of third-party service providers, and supporting documents related to the firm’s representations (e.g. copies of contracts and agreements);
• Information on the firm’s compliance program, such as written compliance policies and procedures;
• “Information to facilitate the staff testing for regulatory compliance in certain areas, including portfolio management and trading activities;” and
• Marketing materials used by the firm to inform or solicit new and existing clients.

EXAMS indicated that it identified the following issues, among others, in its review of Examinations of newly-registered advisers:

Compliance Policies And Procedures:

• Policies and procedures that did not adequately address relevant risks, such as fee billing and portfolio management;
• Lack of procedures to enforce the firms’ policies;
• Lack of adherence to policies and procedures, “typically because the personnel were not aware of the policies or procedures or the policies or procedures were not consistent with their business or operations;”
• Annual compliance reviews that failed to discuss whether firms’ policies and procedures were adequate, and whether they were implemented effectively. For example, EXAMS observed firms that:
  • Used “off-the-shelf” compliance manuals that were not consistent with the Firms’ operations;
  • Allocated inadequate resources to comply with regulatory requirements and firms’ own policies and procedures (e.g. assigning a CCO to “additional and unrelated responsibilities,” which reduced their time for compliance-related tasks);
  • Compliance personnel who lacked familiarity with the firm’s actual business practices;
  • Undisclosed conflicts of interests owing to advisory persons’ multiple roles and responsibilities;
  • Outsourcing business and compliance functions without conducting necessary due diligence to ensure they were being performed in alignment with the firm’s policies and procedures;
  • Lack of business continuity plans, including succession plans.

Disclosure Documents And Filings:

• Disclosure documents containing omissions or inaccurate information, particularly regarding:
  • Fees and compensation;
  • Business or operations (e.g. affiliates, number of clients, and assets under management);
  • Services offered to clients, such as disclosing investment strategy, aggregate trading, and account reviews;
  • Disciplinary information;
  • Websites and social media accounts; and
  • Conflicts of interest.
• Untimely filings (e.g. filings made late, or not at all).

Marketing:

• False or misleading information on items such as:
  • Inaccurate information about the professional experience or credentials of advisory personnel;
  • Third-party rankings;
  • Performance; and
  • Inability to substantiate facts used in advertisements

The risk alert concluded with a table of resources to assist firms’ compliance programs. These resources, as well as the rest of the Risk Alert, can be found here: https://www.sec.gov/files/risk-alert-newly-registered-ias-032723.pdf

These observations are consistent with EXAMS stated priorities and past guidance for newly-registered advisers. Written polices and adherence to them, timely filings with accurate disclosures, and compliant marketing can be a challenge for any registrant. Consider partnering with Fairview Investment Services to strength your compliance program.

Fairview Investment Services provides comprehensive and ongoing compliance services, including comprehensive marketing and advertising review, promotor-related consulting, and complete examination support. Contact Fairview for additional information about maintaining your compliance program in an ever-changing regulatory environment.