SEC Implements Investment Adviser
Risk Assessment Program

The Securities and Exchange Commission (SEC) has recently implemented a one-day exam program to assess a firm's compliance with the risk management and internal control obligations of the Investment Advisers Act of 1940. In addition to its review of related documentation, the SEC is specifically interviewing senior management and/or the Chief Compliance Officer to obtain "an overall view" of the respective investment adviser's organization, control environment and compliance culture, as well as specific control procedures utilized by the firm. During the review, the SEC intends to obtain a broad overview of the investment adviser's risk management process along with internal controls and, if necessary, take appropriate action based on the findings. Ultimately, it appears the review program will allow the SEC to increase the implementation of its audit and review program to a larger number of firms (due to the limited nature of the review), while at the same time, cutting to the heart of a firm's "compliance culture" for regulatory purposes.

From a regulatory perspective, risk assessment involves identifying and prioritizing issues and conflicts regarding a firm's operations that may create risk to the interests of the firm and/or its clients. Some categories of risk may include operational, strategic, financial, compliance, and reputation. Additionally, under the current rules investment advisers should review their procedures on an annual basis and identify risks to their firm as well as to their clients' accounts. This is to ensure a firm's compliance department recognizes, eliminates, or mitigates any gaps or weaknesses in their process.