SEC staffers have long asserted that their efforts are informed by a risk-based assessment in selecting registrants for examination. A key component of this has been introductory or new registrant exam, intended to give examiners an opportunity to set a baseline for each new firm. In fact, examination of new registrants was identified as a priority in the National Exam Program since 2014.
The 2021 Examinations Priorities emphasized that these introductory exams are still being prioritized. “As part of its risk-based examination approach, the Division will also continue to conduct examinations of RIAs that have never been examined, including new RIAs and RIAs registered for several years that have yet to be examined, with a particular focus on firms’ compliance programs.”
The initial request list is generally limited to 15 to 20 items. New registrant exams are typically done remotely, even in non-pandemic years. Initial questions focus on the nature of the firm itself – its purpose and goals, its investment strategy, how the firm targets new clients or investors, and revenue sources. Examiners will ask about the firm’s investment strategy and its implementation, including use of derivatives. As expected, examiners will seek to assess the firm’s culture of compliance. Examiners may ask the CCO about the firm’s risks exposures and the process for identifying those risks. CCOs should expect questions about their background and those of any other staff supporting compliance.
If the SEC senses that a firm is not well prepared and aware of regulatory expectations, the typical next step would include a follow up exam sooner and being put at a higher risk level on the SEC’s exam cycle. Hence, why its even more important to present a great first impression.
We have seen efforts in recent years to maintain a prompt schedule and have seen some new registrant exams begin within a few weeks of registration. Advisers should be prepared in advance of filing and train staff on the policies and procedures.
We are seeing some new posturing with the approach to enforcement as we recently discussed. It will also be interesting to see how Gensler influences the direction of enforcement and exam priorities.
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