In 2012, the SEC examined approximately eight percent of registered firms. In 2017, approximately 15 percent of RIAs were examined, despite an increase in the number of registrants and the agency’s limited resources. How did they manage to nearly double the percentage of firms examined? One word: Technology.
Over the last several years, the SEC has increased its use of various technologies to conduct remote exams of registered firms. With the ability to request and receive electronic documents and records, the regulator can review and analyze a firm’s activities without leaving SEC headquarters.
Given the success of electronic methods and tools in helping regulators identify and follow up on potential violations, it’s safe to say that registered firms should expect to receive more electronic data requests, and to be the subject of increased technological oversight, in 2018 and in the years to come.
Increase in Risk-Based Examinations
In its 2018 Examination Priorities announcement, released in early February, the SEC reiterated its intention to continue focusing on newly-registered advisers, as well as those that haven’t undergone an SEC exam in years. Of course, with limited resources, it would be impossible to examine 100 percent of these groups this year.
To narrow the field, the SEC’s Office of Compliance Inspections and Examinations (OCIE) intends to use data gathered from a variety of sources and use a risk-based approach to analyze that data. Firms with elevated risk profiles will then be selected for further oversight.
Outlining its guiding principles for 2018, OCIE noted “Our use of data is integral to the program and complements our risk-based exam approach and utilization of technology.”
Firms are Leveraging Technology to Stay Ahead of the Regulators
Regardless of how long an RIA has been in business or whether its activities could potentially cause it to be identified as higher risk, firms should be leveraging today’s technologies too.
Relying on paper documents or spreadsheets to manage compliance activities in the digital era isn’t just an inefficient and antiquated practice; it’s also fraught with the potential for violations to slip through the cracks, undetected. As if those weren’t reasons enough to adopt a compliance technology platform, there’s also the harsh reality that manual processes don’t scale and do not support firms’ growth initiatives
Compliance technologies today do more than simply provide a repository for firms’ policies and documents. They can facilitate personal trading and reviews of trading activity by using electronic feeds, rather than relying on paper statements, help firms manage their codes of ethics, track potential and actual compliance violations and much more.
Using Compliance Technology Can Help Prepare Your Firm for an SEC Exam
There’s no question that firms should expect more electronic regulatory oversight; the only question is how prepared your firm will be to accommodate and facilitate and respond to electronic examinations and targeted inquiries.
When the SEC sends a request for electronic documents and records, having the right systems in place can streamline your response time and effort. This alone sends a positive message to the regulators, as it demonstrates your commitment to complying with federal securities laws and regulations.