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The SEC’s Division of Examinations is the primary regulatory institution responsible for SEC examinations to ensure companies are compliant and transparent with the public. They aim to ensure market integrity and protect investors.
The tru Compliance department stresses that receiving an SEC exam on your firm should not be viewed as an “if” but a “when.” ALL new advisors will receive an exam around the anniversary of their first year of being registered. After that, several variables come into play on when your next exam will be. It could be a “routine” exam that occurs periodically (there is not a set schedule), “for cause” (prompted by a complaint or something that shows an advisor may be violating regulation) or a “sweep” (random – your firm name was pulled out of the proverbial hat).
As the Chief Compliance Officer for tru's Independent RIAs, tru's Compliance team gets to spend a lot of time with the SEC. Given that, you may be curious as to what we have we seen the SEC focus on during the first two quarters of 2024 and what are the common themes?
It should be noted that examination findings for firms are non-public UNLESS it becomes public record in court proceedings or through SEC enforcement. Generally, a firm will receive a non-public deficiency letter detailing areas that the examination shows may need attention. In fact, per the SEC, 95% of firms will receive such a letter. That said, the below are themes we have seen in the first half of 2024:
- The Marketing Rule (specifically performance reporting)
- Dual Registrants (both registered as an RIA and BD) and Regulation Best Interest (Reg-BI)
- Cybersecurity
- Artificial Intelligence integrations
- Crypto Assets (management of)
For a more detailed synopsis, on an annual basis, the SEC publishes an Examination Priorities Report, which sheds light on its focal areas and priorities for the year. Highlighted below are the top items for advisors and you can find the full report here: https://www.sec.gov/files/2024-exam-priorities.pdf
The core takeaways are:
- Fiduciary Duty and Putting Clients First
- Focus on Products
- Emerging Fintech and AI
- Marketing Practices
- Compliance Programs
- AML and Cybersecurity
- Third-Party Vendor Management
- Enhanced Disclosure
Lastly, having been through many exams with tru Independence partner firms, here are key takeaways that individuals often learn from SEC exams. These insights help firms and individuals not only meet regulatory requirements but also improve overall business practices and client service.
- Compliance Requirements: Clear understanding of updated compliance regulations and requirements relevant to their industry and operations.
- Documentation: Importance of maintaining thorough and accurate documentation of all transactions, communications, and compliance efforts.
- Risk Management: Identification of potential risks and implementation of effective risk management strategies.
- Cybersecurity: Emphasis on robust cybersecurity measures to protect client information and firm data.
- Best Practices: Learning about industry best practices for operations, client management, and reporting.
- Ethics and Conduct: Ensuring adherence to ethical standards and proper conduct in all business activities.
- Internal Controls: Strengthening internal controls to prevent errors, fraud, and other irregularities.
- Regulatory Updates: Staying informed about the latest regulatory updates and their implications for business operations.
- Training and Education: Recognizing the importance of ongoing training and education for staff to maintain compliance and enhance skills.
- Response Protocols: Developing and testing response protocols for potential regulatory inquiries or audits.
All said, SEC exams can be quite nerve-wracking and stressful but unless the examiners find an egregious failure with your firm or repeat offenses, please do not lose sleep thinking about an examination. As a seasoned CCO, I look at these examinations as a way to see where we can strengthen gaps and make our policies or procedures (sometimes both) more robust.
Being prepared for an exam is also half the battle. The team at tru is always prepared when the SEC comes knocking.
Please reach out if you have any questions in regard to examinations and what to expect.