What Are the Specific Priorities for Investment Advisors?
The SEC highlighted three areas of focus for registered investment advisors:
- Firms’ adherence to fiduciary standards of conduct
- The effectiveness of advisors’ compliance programs
- Never-examined and recently registered advisors
What This Means for Investment Advisors and Their Representatives
- Fiduciary Standards
The SEC adopted Regulation Best Interest (Reg BI) in 2019, which harmonized the standards of care applicable to broker-dealers and registered investment advisors. To ensure adherence with advisors’ fiduciary obligations, the SEC examiners will review the advice and disclosures provided to clients to determine:
- The impact of advisors’ financial conflicts of interest
- Advisors’ consideration of risks associated with their advice, such as the use of high cost and complex investments, ensuring harmony with the clients’ investment objectives, and likely performance in various market conditions
- If advisors are seeking the best execution of financial transactions to maximize the value received by their clients
- Compliance Programs
A review of a firm’s compliance program will obviously be the central focus of any non-targeted SEC exam. Examiners routinely analyze firms’ marketing, trading, portfolio management, potential custody issues, and required disclosures and filings. More importantly, examiners will seek to determine whether the firm actually complies with its written policies and procedures. In particular, examiners will consider whether the firm’s disclosures adequately address any fee-related conflicts.
- Information Security and Operational Resiliency
Protecting clients’ confidential financial information has been a priority of the SEC for many years. As a result, examiners will pay close attention to firms’ cybersecurity policies and procedures, data loss prevention, access controls and responses to cyber-related incidents (which are now subject to SEC Regulation S-P). They will also focus on the training and security controls firms are employing to lessen the risk of a data breach.
Action Items for Advisors
| Action | Why it Matters |
| Review “Know Your Customer” policies and procedures | An advisor’s fiduciary duty under Reg BI begins with crafting an investment portfolio that is appropriate to each individual client’s needs |
| Ensure firm is following its compliance policies | Compliance is not just about having the correct written policies and procedures. It requires adherence to those duties |
| Test the firm’s cybersecurity protocols | Cyber incidents are not only costly to rectify, they can seriously diminish the firm’s reputation for protecting its client’s assets |
The Bottom Line
Given the trust clients put in financial services firms – and the unfortunate history of fraudulent actors in the industry – SEC audits are a necessary component of doing business. As a result, firms should view such audits as a means for improving their commitments to their clients, rather than as a hassle or unnecessary intrusion into their operations.
Endeavor Retirement is staffed with former CCOs who are familiar with the examination process and can help your firm prepare for its inevitable review. Let us know if you need our assistance.