Mock Exams — Integral Tools Keeping RIAs Compliant

The Securities and Exchange Commission (SEC) has significantly intensified its examinations of RIAs in recent years. The Commission performed 2,251 exams on 16% of RIAs in the fiscal year 2021, up from 10% in the fiscal year 2015.

The agency has announced an even more stringent regulatory agenda for this year, prioritizing assessments of a number of key focus areas, including: private funds, crypto-assets, standards of conduct, information security, operational resiliency, regulation best interest, and environmental, social, and governance (ESG) investment.

Firms that have not yet been reviewed, such as those that have recently registered or those that have not been examined in a number of years, will be among the first to draw SEC focus.

Advisors have expanded their varied approaches to ESG investing and have boosted the number of product offerings across numerous asset classes in response to investor demand. These increases, combined with the lack of standardized ESG criteria and the fact that this is a new and evolving category altogether, could result in increased compliance concerns. The SEC warned RIAs about ESG disclosures last year through a risk alert. Because of this, these challenges make ESG and sustainable investments a good candidate for mock exams. RIAs should make sure to assess their compliance with ESG to make sure any investments are in alignment. 

Cybersecurity breaches, such as social engineering fraud and ransomware, are now posing a growing number of compliance issues.

Among the 13 total categories of SEC enforcement actions against IARs and RIA firms, combined civil and freestanding SEC enforcement actions are the second-highest, accounting for 28% of total actions in the fiscal year 2021, up from 23% in the fiscal year 2020.

This increased regulatory focus, along with the emergence of new areas of exposure, might put advisers’ compliance capabilities to the test. That’s why RIAs must ensure that their compliance policies and processes are up-to-date and are adhering to the changing regulatory landscape.

It’s a good idea for RIAs to utilize mock exams.

Mock examinations are becoming a popular way for RIAs and firms to improve their SEC compliance practices. Mock exams are based on the experience of an RIA firm’s chief compliance officer and/or third-party consultants. These specialists apply compliance testing approaches centered on SEC risk-alert trends and areas addressed in similar exams. As a result, mock exams are very effective when identifying and managing compliance issues.


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If an RIA hasn’t taken a mock exam yet, it’s usually due to a lack of resources or a perception that the prospective return on investment is low. Nonetheless, the case for conducting them has never been stronger.

Any SEC examination that reveals findings worthy of a full investigation and possible enforcement action(s) can have significant financial ramifications for an RIA or firm, as defense costs can easily exceed millions of dollars. For RIAs, the reputational impact might be much more significant, potentially leading to a loss of client confidence and asset redemptions.

While it’s not a guarantee, fixing compliance flaws revealed in a simulated exam may help prevent an SEC examination from growing into a full-fledged probe, which could result in an E&O insurance claim and deductible, as well as an additional enforcement action.

Because the scope of SEC tests continues to evolve and result in harsher punishments, as well as the potential for significant financial and reputational harm from a formal SEC investigation, it makes good business sense for RIAs to incorporate simulated exams in their efforts to avoid such consequences.

Look no further for compliance assistance.

AdvisorLaw offers ongoing legal and compliance consulting support to RIAs and RIA firms. We stay on top of SEC and state regulatory developments so you can focus on building your practice. If you have any issues, please don’t hesitate to contact us — our compliance services include a complimentary attorney consultation. 

To make task administration and reporting simple, we provide a custom interface and tailored calendar. AdvisorLaw provides effective automation and full control through smart technological integration. We can assist your RIA in remaining in compliance with all SEC and state regulations. 

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