Newly Registered RIAs Under Increased Scrutiny

Over the last five years, the number of registered investment advisors has significantly increased by more than 20%, causing the SEC to take notice. As a result, the SEC’s exam division has been prioritizing the examination of newly registered advisors soon after they become registered. This increased scrutiny is aimed at ensuring that these advisors are compliant with the Advisers Act and that their practices and representations to clients and the SEC are consistent.

The SEC’s examination process involves document requests and interviews to thoroughly examine all aspects of the advisor’s business, including operations, affiliations, investment activities, the existence of and adherence to internal policies, and client disclosures. The goal is to evaluate the advisor’s compliance with regulations and determine whether they’re operating in a manner consistent with their representations to clients and the SEC.

As the number of SEC-registered advisors continues to grow, it’s important for newly registered advisors to be aware of this increased scrutiny and to prioritize compliance with regulations. By doing so, they can build trust with clients, avoid potential legal issues, and set themselves up for long-term success in the industry.

SEC Issues Risk Alert To Newly Registered RIAs

In late March 2023, the SEC released a Division Risk Alert, summarizing its examination of materials submitted by newly registered advisers and identifying issues related to compliance policies and procedures, disclosure documents and filings, and marketing practices. Some of the issues included policies that inadequately addressed risk areas, procedures that did not support adherence to stated policies, omissions or inaccurate information detailed on disclosure documents, and inaccurate or misleading information used in marketing materials.

Third-Party Assistance
One of the primary issues identified was that newly registered investment advisors may be relying too heavily on inadequate third-party vendors for both business and compliance functions. This overreliance could potentially compromise the quality of the advisor’s work, leading to deficiencies in compliance policies and procedures and disorganization. Additionally, some RIAs may have assigned multiple, unrelated responsibilities to the chief compliance officer, resulting in limited time for that executive to focus on and ensure compliance.

Conflicts Of Interest
The SEC also warned firms against failing to completely disclose and mitigate conflicts of interest in a timely manner, and distributing false or misleading marketing. The report noted that some required disclosure documents “contained omissions or inaccurate information and untimely filings.” Inaccuracies were found in advisors’ fees and compensation, as well as in business or operations, including affiliates, other relationships, number of clients, and assets under management. Misrepresentations were also found in services offered to clients, such as disclosure regarding advisors’ investment strategies. These inconsistencies can lead to mistrust between the advisor and their clients, and they can potentially result in regulatory action being taken. Accurate and timely disclosure is essential to building trust with clients and ensuring that advisors comply with regulatory requirements.

Boilerplate Templates
The report also revealed that some newly registered investment advisors were found to be using “off-the-shelf compliance manuals that were not tailored for consistency” with their operations and business lines. This approach may not “devote sufficient resources to comply with regulatory requirements and their own policies and procedures.” These generic manuals don’t address all the unique risk areas of an advisor’s operations, leaving them vulnerable to regulatory scrutiny. Advisors must make sure that their compliance policies and procedures are applicable to their business, that they’re up to date, and that they’re being followed consistently.

Marketing Materials
Finally, the SEC observed that some newly registered investment advisors were distributing false or misleading marketing materials that “appeared to contain false or misleading information, including inaccurate information about advisory personnel professional experience or credentials, third-party rankings, and performance.” Some advisors were even unable to substantiate certain factual claims in their marketing materials.

What You Can Do

To avoid these issues, every newly registered adviser should tailor their disclosures and compliance policies and procedures to fit their business, rather than using generally applicable materials or templates prepared by service providers without alteration. They should also conduct comprehensive conflicts and risk assessments in order to effectively tailor their disclosures and compliance policies and procedures, and consider conducting a mock examination before an actual SEC examination. Accurate and timely disclosure is also essential to building trust with clients and complying with regulatory requirements. Finally, advisors must make sure that all marketing materials are accurate and not misleading in any way. By closely reviewing their policies, procedures, disclosure documents, filings, and marketing materials, advisers are more likely to achieve a more efficient process and avoid the issues identified by the SEC. Doing so can help them to avoid SEC or State regulatory actions and build a strong foundation for their business, as well.

How AdvisorLaw Can Help

If you are a newly registered RIA feeling overwhelmed and unsure whether your compliance policies and procedures are up to par with SEC regulations, AdvisorLaw can help ease those worries and provide you with ongoing compliance services that are tailored to your firm’s needs.

Unlike online RIA template services, AdvisorLaw’s compliance team includes securities attorneys and certified securities compliance professionals who stay up to date with the latest SEC and state regulatory changes. We provide a custom portal and task workflow to make task management and reporting easy, offering efficient automation and full control.

Our ongoing compliance services include updates to Form ADV, reviews, and updates to RIA documents, such as policies and procedures manuals, privacy policies, investment advisory agreements, cybersecurity policies, code of ethics, and business continuity plans. We also offer marketing reviews, support emails, trade reviews, reviews of conflicts of interest, outside business activities, disclosures, task reminders, and all required filings.

At AdvisorLaw, we understand that cybersecurity is also a critical component of your business. That’s why we also offer CyberProtection services to protect your firm from potential cyber threats.

In addition to our standard ongoing compliance services, we offer Enhanced Ongoing Compliance services, including email reviews, trade monitoring and reviews, and annual attestations. For those who don’t have someone with the time or inclination to be an effective CCO, we offer outsourced Chief Compliance Officer (CCO) options.

Don’t leave your compliance needs to a chance with an online template service. Let AdvisorLaw’s experienced compliance team help you navigate the complex world of regulatory compliance.

Contact us today for a complimentary consultation.

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Michelle Atlas-Quinn, J.D.