On September 6, 2023, the staff of the SEC’s Division of Examinations issued a risk alert describing the staff’s risk-based approach in selecting registered investment advisers to examine and in determining the scope of areas of examination. The staff stated that its risk-based selection approach is dynamic and adapts to market conditions, industry practices and investor preferences. Due to the size and variety of advisers, the staff stated that it could select an adviser for examination to evaluate risks at the particular firm, to respond to events posing risks to investors or the broader market, or to assess how firms adapt to new regulations. The staff noted its use of technology to collect and analyze industry-wide and firm-level data to identify risks and better understand a firm’s business in an examination. The staff noted that although the information shared in the risk alert is intended to highlight risks and issues relating to examinations that the staff has identified, the risk alert may also assist firms in their supervision, compliance and risk management efforts and may inform changes that firms can make to strengthen those efforts. 

In the risk alert, the staff identified the following factors in its process for selecting advisers and determining the scope of areas for examination:

• The staff stated that it may select advisers for examination based on factors such as the firm’s risk characteristics; a tip, complaint or referral; the staff’s interest in a particular risk area, which may be reflected in the staff’s annual examination priorities; and the scope of the advisory services the firm provides. 
• The staff stated that it selects advisers for examination in consideration of firm-specific risk factors related to a adviser’s business activities, conflicts of interest and regulatory history, including, among other things, observations from prior examinations, supervisory concerns such as the disciplinary history of advisory personnel, business activities that may create conflicts of interest, time elapsed since the adviser’s initial registration or last examination, material changes in firm leadership or other personnel, media reports or third-party data and whether the firm has access to client assets or presents gatekeeper or service provider compliance risks.
• The staff stated that once an adviser is selected for examination, the staff will conduct additional risk assessment to determine the scope of the examination, which will vary depending on the firm’s business model, associated risks and the reason for the examination. The staff stated that it reviews advisers’ operations, disclosures, conflicts of interest and compliance practices regarding core areas such as custody and safekeeping assets, valuation, portfolio management, fees and expenses, and trade execution. In an examination, the staff requests documents and information from these areas to understand the adviser’s conflicts of interest and its risks and related controls and to test the effectiveness of the adviser’s compliance policies and procedures to monitor, mitigate and manage risks and conflicts of interest.

The staff also attached a typical initial information request to the risk alert to inform advisers regarding the documents and other information the staff typically requests in an examination.
The risk alert is available here.