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If you haven’t planned for an SEC audit, you should, especially if you’re a new or a small RIA firm. But even large, well-established RIAs are getting audited by the U.S. Securities and Exchange Commission these days. Last year the SEC examined 15% of RIAs and 47% of broker-dealers.


The pace of audits is not slowing. The SEC’s 2023 budget request of $2.15 billion is $240 million more than 2022, with plans to add 90 new positions, including 34 to monitor investment advisors and 25 for broker-dealer Reg BI compliance.




Examination Priorities


Here is the SEC’s 2021 Examination Priorities report still in effect:


The report outlines what issues the SEC will focus on during an audit and states that the SEC will “continue to examine RIAs who have never been examined, with a particular focus on the firms’ compliance programs.”




New SEC Guidance


In its new guidance released on August 3rd here, the SEC states in its first Q&A point that “all broker-dealers, investment advisers, and financial professionals have at least some conflicts of interest with their retail investors. Specifically, they have an economic incentive to recommend products, services, or account types that provide more revenue or other benefits for the firm or its financial professionals.”


The SEC notes that it’s “important that firms and their financial professionals review their business models and relationships with retail investors to address conflicts of interest specific to them.” Addressing conflicts under Regulation Best Interest and the Advisers Act fiduciary standard “should not be merely a ‘check-the-box’ exercise, but a robust, ongoing process that is tailored to each conflict.”


After full examination and disclosure of conflicts of interest with your clients, you must mitigate them or else not move forward. The “disclosure of conflicts alone does not satisfy the obligation to act in a retail investor’s best interest.”


The SEC continues: “Under both the Reg BI and the IA fiduciary standard, firms and their financial professionals can provide recommendations or advice only when they have a reasonable basis to believe that the recommendation or advice is in the retail investor’s best interest.”




New Rollover Rules’ Slow Adoption


On July 1st, new rollover rules took effect for retirement accounts, and many firms are not implementing them properly yet.




Read some of the basics about the new retirement account rollover rules in an article by Quantum’s Partner and President of Distribution, Jim Maschek.




Common compliance problems when it comes to the new rollover rule include:


  • Some firms don’t realize that the new rules apply to both plan-to-IRA and IRA-to-IRA rollover recommendations
  • There have been failures to disclose that both types of rollover recommendations are conflicts of interest
  • Firms are not providing retirement investors with the newly-required fiduciary status acknowledgement
  • Firms and advisors are lacking policies and procedures to mitigate rollovers’ conflicts of interest


You can read more rollover compliance issues and how to avoid problems here.




More Rules and Changes Are Coming


There are five more rules that the SEC will review and likely update this year, including updating custody rules that have been in effect since 1940, reining in special-purpose acquisition companies, reviewing exchange-traded products, and addressing cybersecurity issues and digital engagement practices.


And, not to be outdone, the Labor Department will also be sending a new fiduciary rule proposal to the Office of Management and Budget this December for their review. These reviews can take up to 90 days by the OMB, which could mean that in early 2023 a new “DOL Rule” could be in play.