The world might have endured a pandemic shutdown since early 2020, but Securities and Exchange Commission examinations have continued apace—if remotely—since early in the pandemic, and they are no less vigorous, warned SEC and industry attorneys who spoke at the Investment Adviser Association’s 2021 Compliance Conference.
“I have experienced vicariously a handful of examinations that clients have gone through, and I can confirm that after an initial period of figuring out the mechanics of doing remote examinations, the whole thing settled into a groove pretty quickly,” said one conference panelist, Mark Perlow, a partner at global law firm Dechert. “It seemed like a full-bore examination.”
Perlow spoke on the panel session “Tips and Trends to Help Advisers Prepare for SEC Examinations.”
Advisors and their compliance officers should pay careful attention to their Form CRS, a centerpiece investor disclosure form of Regulation Best Interest, which could be one of the first things that examiners want to discuss, according to Kristin Snyder, co-deputy director of the SEC’s Division of Examinations. The agency is looking at “the basics on content, to determine if there are any omissions of required information from the form [and] to ensure that there is a consistent presentation of the information.”
Specifically, SEC examiners are finding that many advisors are stumbling over Form CRS’s section on disciplinary information. Some have inappropriately marked “no” in this section when their firms or reps have disciplinary history, Snyder said.
“People are used to thinking of disciplinary history in a particular way,” namely the way it’s treated in Form ADV, said Anil Abraham, associate general counsel and senior vice president at New York-based Focus Financial Partners. “But the CRS is a different beast. It’s a very low threshold [for reporting disciplinary history].”
“The challenge for the industry,” Perlow said, “is trying to meet the spirit of the form, giving the essential information that the SEC wanted in the format that the SEC wanted in a user-friendly way—but at the same time sell yourself short or leave out key points.”
Michelle Jacko, managing partner and CEO of Jacko Law Group, stressed the need for advisor firms and their compliance officers to think about the accuracy and effectiveness of their Form CRS as a year-round exercise. She recommends that advisors evaluate themselves continuously to make sure there hasn’t been a material change that warrants an update.
She also advised firms to think about their operational complexities and to identify “who is responsible for delivering the Form CRS and when.”
Document Fiduciary Responsibilities
Jacko stressed the need for clear documentation to demonstrate to SEC examiners that a firm is mindful about its fiduciary responsibilities. “We all know that we have to do what’s in the best interest of clients. The challenge is the documentation. I’ve seen a lot of analysis being done, but that analysis isn’t necessarily documented,” she warned. Advisors should be writing down why a client has been placed in a particular program type, strategy or mutual fund share class, Jacko said.
She also suggested that compliance professionals should be able to say, “Not only have we thought about it, we’ve documented it, we’ve developed an internal control system to better assess whether what we’re doing is truly in the best interest of the clients.”