Archive for the ‘examinations’ Category

When the SEC issues it’s yearly National Examination Guidelines detailing what its examiners will look for in audits of the more than 11,000 federally registered investment advisors and 800 investment companies, prudent advisors pay attention. While it’s unlikely that you’ll get examined if you fall into this category given the SEC’s limited resources, the guidelines are very informative in terms fo what issues regulators are paying attention to in any given year and how perceptions of risk are evolving in the financial advisory space.

As reported by Financial Planning magazine this morning, risk around conflict of interest is an ongoing priority for the Commission because conflicts of interest tend to arise constantly and change in nature. Examiners will be looking for specific conflicts of interest, what advisors are doing to mitigate and disclose those those conflicts, which can be particularly challenging for larger advisory firms. During examinations, staff will be analyzing financial and other records to identify compensation arrangements that aren’t being disclosed to clients, which may include:

  • Undisclosed fee or solicitation arrangements
  • Referral arrangements with affiliated entities
  • Receipt of payment for services allegedly provided to third parties

In terms of marketing, the SEC is looking at how advisors market, specifically around performance numbers. The SEC wants to ensure that all advertising of performance numbers is accurate, including that of hypothetical and back-tested performance and will look at assumptions and methodology, disclosures and compliance with record-keeping requirements.

The SEC’s other priorities in examinations include fraud detection and prevention, technology and corporate governance and enterprise risk management.

The take away for alert advisors? Analyze your practices and processes in these areas to make sure you meet or exceed the SEC’s standards. Talk to your team about potential conflicts of interest and make sure anything that even remotely might look like a conflict is disclosed to clients, whether it would draw a second look in an examination or not.

Whether you are likely to be audited or not, adopting best practices and evolving your practice to meet the highest standards possible is the best route to gain trust with your clients, potential clients, referral sources, employees and other stakeholders.