On March 27, 2023, the Division of Examinations of the Securities and Exchange Commission (SEC) published a risk alert (Alert) entitled "Observations from Examinations of Newly-Registered Advisers," reiterating its stated emphasis on conducting examinations of investment advisers that are newly registered with the SEC (New Advisers) and summarizing typical focus areas and recent observations made with respect to such examinations.

The number of investment advisers registered with the SEC has increased by more than 20% in the past five years, and the SEC has made it a point of emphasis dating back to 2013 to conduct compliance examinations of New Advisers, typically occurring within 12 to 18 months after the date of a New Adviser's registration. The SEC views examinations of New Advisers as an opportunity for early engagement between New Advisers and the SEC, and that such examinations allow the SEC to conduct preliminary risk assessments, facilitate discussions regarding New Advisers' operations and risk characteristics, and promote compliance with the Investment Advisers Act of 1940 (Advisers Act) and other applicable statutes and regulations. The SEC's information gathering processes during examinations typically feature document requests and personnel interviews addressing the New Adviser's business and investment activities, organizational affiliations, compliance policies and procedures and disclosures to clients.

In the Alert, the SEC highlighted four primary points of emphasis in examinations of New Advisers, (1) identification and disclosure of conflicts of interest, (2) compliance policies and procedures, (3) disclosure documents and filings and (4) marketing materials. In its recent examinations of New Advisers, the SEC notes that it has identified issues in each of the foregoing categories, and in particular noted the following common deficiencies:

Identification and Disclosure of Conflicts of Interest

  • Undisclosed and unmitigated conflicts of interest created by the multiple roles of advisory personnel.

Compliance Policies and Procedures

  • Use of off-the-shelf compliance manuals not tailored for consistency with the actual operations and business lines of the New Adviser.
  • Outsourcing of certain business and compliance functions without adequately assessing the perform of such outsourced functions for compliance with the New Adviser's compliance policies.
  • Lack of sufficient compliance procedures to support personnel compliance with stated policies, and lack of sufficient resources devoted to compliance departments and functions.
  • Lack of adequate business continuity and succession plans.

Disclosure Documents and Filings

  • Required disclosure documents containing omissions or inaccurate information, primarily related to fees and compensation, organizational relationships, number of clients and assets under management, third-party service providers, conflicts of interest,disciplinary information, website and social media use and investment strategy.
  • Untimely or complete lack of required filings, particularly with respect to material or annual form updates.
  • Insufficient recordkeeping of underlying documentation required for the SEC to test compliance functions, such as lack of written compliance policies and procedures, records of client securities holdings and New Adviser trading activities and transactions and investment solicitation materials.

Marketing Materials

  • Marketing materials containing false or misleading information, particularly with respect to advisory personnel experience, credentials and past performance.
  • Insufficient underlying documentation to substantiate factual claims.

New Advisers and investment advisers planning to register should familiarize themselves with the Alert and generally with the compliance obligations placed upon registered investment advisers by the SEC under the Advisers Act and other applicable laws. SEC compliance requires not only adopting required policies, but ensuring that compliance departments are authorized and empowered to take proactive measures such as crafting and enforcing procedures that provide for legitimate follow through on stated policies, and monitoring the compliance of all personnel with those policies and procedures. Demonstrating an entity-wide culture of compliance will be integral to the ability of New Advisers to establish a positive working relationship with the SEC on a go-forward basis.

A link to the full SEC Risk Alert is included below.

Observations from Examinations of Newly-Registered Advisers

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