In March 2023, the Securities and Exchange Commission (“SEC”) released an alert article with some observations that they have seen when examining newly registered firms. Note that these alerts are not rules or regulations of any regulatory authority. However, investment advisory firms and broker dealers can garner many important takeaways that may assist the firm during an examination.

It is important for any new firm – whether broker dealer or registered investment advisor – to start communicating and engaging with its regulatory contacts. Having an open line of communication can provide value to investment advisors and/or broker dealers in building a solid compliance program and add or improve in all areas of current examination priorities.

Per the Securities and Exchange Commission’s published article, newly established firms should focus on the three main areas although the entirety of priorities can be found in the Securities and Exchange Commission 2023 Examination Priorities by the Division of Examinations.

Three Main Focal Points of Newly Registered Firms:

  • The firm must identify and handle all conflicts of interest. Per the SEC, all firms will have some conflict of interest that is required to be disclosed to investors. The examination will study how the firm addresses these conflicts.
  • The firm must provide clear disclosures to all customers such that the customer can make decisions of consent in a confident and informed manner. The firm should never try to hide anything in any way from the client – think Bernie Madoff. He never allowed his clients to even see trade confirms.
  • The firm must implement compliance programs that are effective. If the investment advisory firm or broker dealer does not have the proper compliance programs in place, it will fail during an examination which could lead to large penalties. This SEC Ruling sets forth the guidelines of a firm’s compliance programs.

Although the scope of examination is often greater than the focal points noted above, these observations by examiners may be helpful as it is the firm’s responsibility to incorporate this vital information into its investment advisory or broker dealer compliance program. As stated in Section 206 of the Investment Advisors Act of 1940, every advisory firm or broker dealer has a fiduciary responsibility to its customers.

If your investment advisory firm or broker dealer would like more information on how to prepare for a regulatory examination, the Securities Compliance Management’s team of professionals can help by reviewing compliance programs in place, help you understand what additional compliance programs may be needed, and provide consulting to your firm regarding various matters. Please contact SCM here to schedule a meeting.