AdvisorLaw’s RIA services division has compiled a list of the most common SEC exam deficiencies we saw in 2022. The deficiencies below were found amid compliance documentation from RIA firms that switched to AdvisorLaw’s Ongoing Compliance service after using another provider in the space. Most often, these firms’ former providers were those that attempted to automate compliance by sourcing one-size-fits-all templates with zero attorney review.
If your firm hasn’t been examined in a while, please read through this list. Some of the items may surprise you, and there may be areas that you need to shore up immediately. If your firm is new, you should be expecting an exam soon.
For the most part, an RIA needs to keep two things in mind:
- Follow the rules for making disclosures.
- Follow the procedures you have in place.
Form CRS (ADV 3)
- Reg BI requires Forms CRS to be prominently displayed on website home pages. For example, one firm was cited for having the CRS behind a “Disclosures” link.
- There must be a record of each and every time a CRS is delivered to a customer.
- The “additional information” section must not refer back to other sections of the CRS — it must reiterate any information that belongs in that section.
- All required verbiage must be in the CRS. Specific “conversation starters” are provided in the instructions, and the SEC wants them included, verbatim.
- All incentives must be disclosed. This includes non-cash compensation.
- On the CRS, all questions must be clearly and accurately responded to, with definitive answers.
- The CRS must be readable and contain white space. The SEC does not appreciate any attempt to make the document unreadable, due to sizing, font, structure, etc.
- The fee schedule on ADV 2A must match the fee schedule on the CRS.
Marketing Rule Violations
- All tables and hypotheticals displayed on the firm’s website must be clear and accurate, and proper disclosures must be prominently displayed with the hypothetical. Further, the hypothetical fees published need to always align with the firm’s policies and procedures for charging fees. This is really a matter of constant updating.
- Third-Party Ratings must follow the Marketing Rule. RIAs need to know the multiple criteria for disclosure.
Best Execution – Share Classes
- Mutual fund share class selection must have policies and procedures to ensure that firms recommend the most advantageous mutual fund share class for each account, and firms must employ continued monitoring of mutual fund trades for compliance.
Policies & Procedures
- Policies must have corresponding procedures. It’s one thing to have the policy; it’s another to follow it and monitor for ongoing compliance. This is a major issue for many firms that are not utilizing outsourced CCOs.
- Firm policies need to reference their correct duties. We often find verbiage among clients using “compliance template” providers that is not correct and doesn’t reference the correct standard for an RIA.
Annual Review Violations
Firms must complete annual reviews of their compliance program and must adequately document them. This is not optional.
Code of Ethics Violations
- Firms must review all access persons’ personal securities transactions, properly document each review, and be able to provide evidence of the reviews to the staff, whenever requested.
- Firms must adopt policies and procedures that require supervised persons to promptly report any ethics violation to the CCO.
This is a list of only the most common issues we ran into in 2022! If these, along with all other compliance rules that you need to follow, seem like too much to stay on top of — it probably is.
There are top-notch RIA compliance firms like AdvisorLaw for a reason. Offload much of the work to us so that you can get back to growing your business and being able to sleep soundly at night, knowing that your largest asset is in full compliance.
Updated ADVs are due at the end of March 2023. If you are looking to make a jump to a higher caliber, call us today so that we can get your policies and procedures in order before the big update.
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