RIA Regulatory Compliance Audits: What to Expect

At some point, all Registered Investment Advisory (RIA) firms will face a securities regulatory audit. Whether you are subject to SEC, FINRA, or state-level oversight, understanding the audit process and preparing accordingly can help ensure a smooth experience. Regulatory audits are designed to ensure that firms comply with applicable laws and regulations, protect client interests, and maintain transparent business practices.

What is a Securities Regulatory Audit?

A securities regulatory audit is a routine examination conducted by regulators like the Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), or state securities regulators to assess an RIA firm’s compliance with federal and state securities laws. These audits can be scheduled as part of regular oversight or triggered by client complaints, regulatory red flags, or changes in your business operations.

Audits are part of maintaining the integrity of the financial markets and protecting investors, ensuring that firms are following the rules, keeping proper records, and upholding their fiduciary duties to clients.

Types of Regulatory Audits

There are generally two types of audits that RIA firms may face:

1. Routine Examinations: These audits occur regularly based on the firm’s risk profile, the size of the firm, or how long it’s been since the last audit. Many RIAs can expect to be audited by the SEC or state regulators every few years.

2. For-Cause Examinations: These audits are triggered by specific events, such as customer complaints, regulatory violations, or inconsistencies in your filings. They are more in-depth and focused on particular areas of concern.

RIA Regulatory Compliance Audits: What to Expect

1. Initial Notification and Pre-Audit Documentation Requests

Audits typically begin with a formal notification from the regulatory authority, which could be the SEC, FINRA, or your state securities commission. This notification will provide a scheduled audit date and outline the documentation the auditors will need to review. Commonly requested documents include:

• Firm’s compliance manual

• Client records and agreements

• Advertising and marketing materials

• Financial records, including balance sheets and income statements

• Trade records and transaction documentation

• Code of ethics documentation

• Employee and firm compensation records

• Custody-related documents (if applicable)

  
  

You will generally be given a timeframe to gather these documents before the auditors arrive. In some cases, you may need to submit certain records electronically in advance.

2. On-Site Examination

Once the audit begins, examiners will typically arrive on-site to conduct a thorough review. During the on-site visit, they may:

• Interview key personnel, such as compliance officers, financial advisors, and firm management.

• Review the firm’s processes and procedures, especially those related to compliance, recordkeeping, cybersecurity, and client relations.

• Inspect client accounts and transactions to ensure accuracy and compliance with fiduciary duties.

• Test internal controls to see how well the firm’s policies and procedures are being followed.

• Review the firm’s disclosures (e.g., Form ADV) for accuracy and completeness.

Examiners may request additional documentation or clarification during the process, so it’s important to have relevant staff available to answer questions and provide requested records promptly.

3. Areas of Focus for Auditors

Some key areas of focus during an audit may include:

• Fiduciary Duty Compliance: Auditors will ensure that your firm is acting in the best interest of its clients, providing suitable investment advice, and avoiding or disclosing conflicts of interest.

• Compliance with Advertising and Marketing Rules: Examiners will review your firm’s advertising materials and performance presentations for compliance with SEC marketing rules, particularly regarding testimonials, endorsements, and performance claims.

• Fee Disclosures and Billing Practices: Auditors will examine how your firm charges fees to clients, ensuring that fees are consistent with your Form ADV disclosures and client agreements.

• Cybersecurity: With the increasing emphasis on cybersecurity, examiners will review your firm’s data protection policies and procedures to ensure that client information is secure from cyber threats.

• Books and Records: Regulators will evaluate the accuracy and completeness of your firm’s recordkeeping, including client records, trade documents, and financial statements.

  
  

4. Post-Audit Findings and Follow-Up

After the on-site audit, the examiners will compile their findings. They may issue an initial report that outlines any deficiencies, concerns, or violations they’ve identified. You’ll typically have the opportunity to respond to these findings and implement corrective actions.

In most cases, firms will be required to address any deficiencies promptly. This may include revising procedures, enhancing compliance oversight, updating client disclosures, or implementing new internal controls. Failure to address deficiencies in a timely manner can lead to more severe regulatory actions, including fines or sanctions.

How to Prepare for a Securities Regulatory Audit

1. Maintain Organized Records

   Ensure that all firm records, including client agreements, compliance procedures, trade documentation, and financial statements, are well-organized and easily accessible. Routine internal reviews can help ensure that your records are up to date.

   
   

2. Keep Compliance Programs Current

   Regularly review and update your firm’s compliance program to reflect regulatory changes and evolving business practices. This includes maintaining a current compliance manual, conducting internal audits, and providing ongoing training to employees.

   
   

3. Stay Proactive on Cybersecurity

   Implement a strong cybersecurity framework and regularly test your firm’s security protocols. This is particularly important given regulators’ increased focus on data protection. Ensure that you have policies in place for incident response, data breaches, and client notification.

   
   

4. Review Form ADV and Client Disclosures

   Your firm’s Form ADV must accurately reflect its services, fees, and conflicts of interest. Conduct regular reviews to ensure your disclosures are accurate and consistent with your operations.

   
   

5. Conduct Mock Audits

   Many firms find it helpful to conduct internal or third-party mock audits. These exercises simulate a real regulatory audit and can identify potential weaknesses or areas for improvement in your compliance program.

   
   

6. Establish Clear Communication Protocols

   Make sure your team knows how to handle interactions with auditors. Designate a point person, typically the Chief Compliance Officer (CCO), to liaise with the audit team and ensure that all requests for documentation are handled efficiently.

   
   

Conclusion

A securities regulatory audit doesn’t have to be an intimidating process if your firm is well-prepared. By maintaining strong compliance programs, accurate records, and a proactive approach to regulatory obligations, you can navigate the audit process smoothly and ensure your firm is operating in full compliance.