Do Registered Investment Advisors Dare Roll the Dice with the Securities and Exchange Commission and Its Office of Compliance, Investigation and Enforcement?

An Analysis of the SEC’s Examination Priorities for 2013 in light of “the odds.”

In fiscal 2012 the Securities and Exchange Commission (“SEC”) had less than 150 enforcement actions against registered investment advisers (“RIAs”), of which there are now more than 11,000 subject to SEC jurisdiction. In addition, there are almost 2,000 new advisors that have had to register due to legal changes brought about by Dodd-Frank. Those include hedge funds, venture capital funds and those involving private equity. Annually, the SEC examines approximately only eight percent (8%) of RIAs per year.

The SEC released its examination priorities for 2013 with respect to registered investment advisors. We have narrowed them down to highlight and share some of the items we feel are most likely to impact firms. Those who wish to review the entire release may do so at the SEC’s website or contact the author.


One issue the SEC will address in 2013 examinations is conflicts of interest. The SEC will examine RIA’s policies, procedures and systems in an effort to determine whether they recognize, mitigate and disclose conflicts of interest present in the investment advisors’ business.


A)    Custody of Assets

Safety of assets remains a top priority for the SEC. In doing calculations of recent examination deficiencies, failure to comply with the Custody Rule (Investment Advisers Act Rule 206(4)-2) was present in over one third of the firms according to Office of Compliance, Examinations and Enforcement (“OCIE”). The SEC will be reviewing firm policies and procedures as well as books and records to determine whether firms are:

1)      Appropriately recognizing situations in which RIAs have “custody” as defined in the Custody Rule;

2)      Complying with the Custody Rule’s “surprise exam” requirement;

3)      Satisfying the Custody Rule’s “qualified custodian” provision; and

4)      Following the terms of the exception to the independent verification

requirements for pooled investment vehicles.

B)     Marketing/Performance

This is always a high risk area of concern because of the ultra competitive nature of money management. The SEC and OCIE will be reviewing instances of aberrational performance for signs of weak valuation procedures or fraudulent activity.  The SEC and OCIE’s staff will focus on the accuracy of advertised performance, including without limitation, back tested and hypothetical performance, methodologies and assumptions made and related disclosures. As always, the SEC will look at compliance with record keeping requirements by RIAs.

In conclusion, despite the odds, it makes little sense to roll the dice with an investment advisor’s fate because an adverse examination, investigation or enforcement from the SEC/OCIE could prove to be fatal to RIAs and/or their investment advisor representatives (“IARs”).


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