New RIA? Time to prep for an SEC audit!

If you haven’t planned for an SEC audit, you should. 

Why? Because you are likely to face one. Advances in technology and the adoption of a data-centric approach have made it fast and easy for the SEC to comprehensively audit even the smallest firm, regardless of its location. 

The SEC’s 2021 Examination Priorities report states that it will continue to conduct examinations of RIAs that have never been examined, including new RIAs, with a particular focus on firms’ compliance programs. Furthermore, the division is expanding its coverage by driving program efficiencies through process and technology, realigning internal staffing to address the coverage rates for RIAs, and increasing training and onboarding of experienced subject matter experts.

The division’s efforts are paying off. In 2020, it completed 2,952 examinations and audited 15% of RIAs, up from 10% in 2014. These numbers are significant because they illustrate the shift in the SEC’s approach. Essentially, it has transitioned from a limited number of labor-intensive, data-sampling audits to an approach that is more comprehensive (in terms of the number of RIAs assessed) and more automated. 

The ability of individuals across different income and wealth tiers to access the financial markets has massively increased in the last two years...

Firm size doesn’t matter, data access does
In preparing for a potential audit, the management team and the chief compliance officer should sit down to talk through each step of the process. Arguably, the most important issue to consider is data access. The audit process goes significantly smoother if all involved can easily access clean data from a single source.

As the SEC’s auditing process has become more automated, technology has also come to play a major role in how firms respond to an audit. Gone are the days of requiring the staff to pull an all-nighter, collecting and organizing paper files to be presented to an auditor in the morning. Modern RIA firms use sophisticated wealth management platforms, enabling staff members to simply pull reports and access data that is readily available. SOURCE