SEC Risk-Based Examination Checklist for Investment Advisers

The SEC Division of Examinations released its fiscal year 2025 priorities on October 21, 2024, and the message is clear: investment advisers need to prepare for more targeted, risk-based examinations. With over 15,396 SEC-registered firms now managing approximately $128 trillion in assets, the stakes have never been higher for maintaining compliance readiness.

This year's examination priorities focus heavily on artificial intelligence usage, Regulation S-P changes, and cybersecurity resilience. But here's what many advisers miss: the SEC isn't just looking for policy documents anymore. They want to see how you actually implement and monitor these policies in your day-to-day operations. (Luthor)

We've analyzed the latest guidance from leading law firms including Mayer Brown and Greenberg Traurig to create a comprehensive pre-examination checklist. This isn't just another compliance document, it's a practical roadmap that translates regulatory priorities into actionable preparation steps. (RIA Compliance)

Understanding the 2025 Risk-Based Examination Approach

The SEC's risk-based examination methodology has evolved significantly. Instead of broad-brush reviews, examiners now use data analytics to identify specific risk indicators before they even walk through your door. The SEC's Enforcement Division pursued over 130 actions against investment advisers and their personnel in 2024 alone, making preparation more critical than ever.

Risk-based examinations typically focus on three key areas: operational risks, compliance program effectiveness, and client protection measures. Examiners arrive with targeted questions based on your firm's specific risk profile, which they've already analyzed using your Form ADV filings, client complaints, and industry benchmarking data. (Compliance Review)

The shift toward AI-powered examination tools means the SEC can now identify patterns and anomalies that might have gone unnoticed in traditional reviews. This makes having robust documentation and clear audit trails absolutely essential for your examination readiness. (One-Compliance)

Core Documentation Requirements for 2025

Written Policies and Procedures

Rule 206(4)-7 explicitly prohibits an adviser from operating without written policies and procedures reasonably designed to prevent violations of the Advisers Act. Your documentation bundle should include:

Portfolio Management Policies

• Investment strategy documentation

• Risk management procedures

• Performance calculation methodologies

• Benchmark selection criteria

Trading Practices Documentation

• Best execution policies

• Trade allocation procedures

• Cross-trading protocols

• Soft dollar arrangements

Personal Trading Controls

• Pre-clearance requirements

• Blackout periods

• Reporting obligations

• Monitoring procedures

The key is demonstrating not just that these policies exist, but that they're actively used and regularly updated. At minimum, the SEC has stated that an RIA's policies should cover several key areas: portfolio management, trading practices, personal trading by employees, accuracy of disclosures, safeguarding client assets, recordkeeping, third-party solicitors, fee billing, privacy protection, and business continuity plans.

Technology and AI Usage Documentation

Given the 2025 focus on AI usage, you'll need comprehensive documentation of any artificial intelligence or machine learning tools in your operations. This includes:

• AI system descriptions and capabilities

• Data inputs and decision-making processes

• Human oversight and control mechanisms

• Testing and validation procedures

• Risk management for AI-driven decisions

RIA compliance software refers to specialized online platforms that help registered investment advisory firms manage and automate their regulatory compliance tasks. If you're using such tools, document how they integrate with your overall compliance program.

Regulation S-P Compliance Checklist

The updated Regulation S-P requirements represent a significant shift in privacy and data protection obligations. Your examination preparation should address:

Privacy Notice Requirements

• Annual privacy notice delivery confirmation

• Opt-out mechanism documentation

• Third-party sharing agreements

• Client consent records

Data Security Measures

• Incident response procedures

• Breach notification protocols

• Vendor due diligence documentation

• Employee training records

Information Disposal Procedures

• Secure disposal methods

• Documentation of disposal activities

• Third-party disposal vendor oversight

• Record retention schedules

The SEC is particularly focused on how firms handle sensitive client information in digital formats. In 2024, the SEC ordered financial companies to pay $8.2 billion in fines and penalties, a 67% increase from 2023, with many violations related to data protection failures.

Cybersecurity Resilience Framework

Incident Response Documentation

Your cybersecurity documentation should demonstrate a comprehensive approach to threat management:

Incident Response Plan Components

• Threat identification procedures

• Escalation protocols

• Communication plans

• Recovery procedures

• Post-incident analysis requirements

Testing and Validation Records

• Penetration testing results

• Vulnerability assessments

• Tabletop exercise documentation

• System backup verification

• Recovery time testing

Vendor Risk Management

Third-party vendor oversight has become a critical examination focus area. Document your:

• Vendor due diligence procedures

• Ongoing monitoring activities

• Contract review processes

• Performance evaluation methods

• Termination procedures

The market for RegTech is projected to reach USD 21 billion by 2027, according to Deloitte, reflecting the growing importance of technology solutions in compliance management.

Interview Preparation Strategy

Key Personnel Readiness

Examiners will interview various staff members, not just compliance personnel. Prepare your team by:

Chief Compliance Officer Preparation

• Policy implementation examples

• Testing methodology explanations

• Issue identification and resolution examples

• Regulatory change management processes

Investment Personnel Preparation

• Decision-making process explanations

• Risk management implementation

• Client communication procedures

• Performance reporting methodologies

Operations Staff Preparation

• Daily procedure explanations

• System usage demonstrations

• Error handling procedures

• Escalation protocol understanding

Common Examination Questions

Based on recent examination trends, prepare responses for:

• "How do you ensure your AI tools don't create conflicts of interest?"

• "Walk me through your process for identifying and reporting cybersecurity incidents."

• "How do you validate the accuracy of your performance calculations?"

• "Describe your process for monitoring employee personal trading."

• "How do you ensure client information remains secure during remote work?"

Testing and Monitoring Procedures

Compliance Testing Framework

Every SEC-registered RIA must fulfill several fundamental compliance obligations established by the Investment Advisers Act of 1940 and its rules. Your testing procedures should demonstrate:

Annual Testing Requirements

• Policy effectiveness reviews

• Control testing procedures

• Exception identification and resolution

• Testing documentation standards

Ongoing Monitoring Activities

• Daily operational checks

• Weekly risk assessments

• Monthly compliance reviews

• Quarterly comprehensive evaluations

Documentation Standards

Maintain detailed records of all testing activities, including:

• Testing scope and methodology

• Findings and exceptions

• Corrective actions taken

• Follow-up verification

• Management reporting

RIA compliance software is needed to tame this rising complexity, by automating routine checks and flagging issues before they become violations. Consider how technology can enhance your testing and monitoring capabilities.

Regulation BI and AML Readiness

Regulation BI Compliance

While primarily applicable to broker-dealers, investment advisers with dual registration need comprehensive Regulation BI documentation:

Disclosure Obligations

• Material conflict identification

• Fee and compensation disclosures

• Capacity clarification procedures

• Client communication standards

Care Obligations

• Suitability determination processes

• Reasonable basis requirements

• Documentation standards

• Ongoing monitoring procedures

AML Program Requirements

Your anti-money laundering program documentation should include:

• Customer identification procedures

• Suspicious activity monitoring

• Reporting protocols

• Training documentation

• Independent testing results

Firms with over $100 million in assets generally must register with the SEC, while smaller advisers (typically $25-100 million AUM) register at the state level. Ensure your AML program matches your registration requirements.

T+1 Settlement Controls

The transition to T+1 settlement has created new operational risks that examiners are actively reviewing:

Settlement Risk Management

• Trade confirmation procedures

• Settlement instruction validation

• Exception handling protocols

• Client communication procedures

Operational Controls

• System capacity verification

• Backup procedure testing

• Vendor coordination protocols

• Contingency planning documentation

Documentation Requirements

• Policy updates reflecting T+1 requirements

• Training records for affected staff

• Testing results and validation

• Issue tracking and resolution

Technology Integration and Automation

Compliance Technology Assessment

57% of wealth managers increased their tech budgets specifically to boost efficiency through compliance solutions. Your examination preparation should address:

System Integration Documentation

• Data flow mapping

• Integration testing results

• Error handling procedures

• Backup and recovery protocols

Automation Controls

• Automated process documentation

• Exception handling procedures

• Human oversight requirements

• Validation and testing protocols

Data Management Procedures

Demonstrate robust data governance through:

• Data quality controls

• Access management procedures

• Retention and disposal policies

• Backup and recovery testing

A compliance review is an in-depth assessment of an organization's operations, policies, and procedures and how those align with regulations. Regular technology assessments should be part of your ongoing compliance review process.

Examination Day Logistics

Document Organization

Organize your examination materials using a systematic approach:

Electronic Document Management

• Searchable file naming conventions

• Version control procedures

• Access permission settings

• Backup availability verification

Physical Document Preparation

• Organized binders by topic

• Index and cross-reference systems

• Copy availability for examiners

• Secure storage procedures

Facility Preparation

• Dedicated examination space

• Technology access and support

• Privacy and confidentiality measures

• Staff availability scheduling

Communication Protocols

• Designated examination coordinator

• Internal communication procedures

• External counsel coordination

• Client communication management

Post-Examination Follow-Up

Deficiency Response Procedures

Prepare for potential examination findings by establishing:

Response Framework

• Issue assessment procedures

• Corrective action planning

• Implementation timelines

• Progress monitoring systems

Documentation Requirements

• Finding acknowledgment procedures

• Corrective action documentation

• Implementation verification

• Ongoing monitoring plans

Continuous Improvement Process

Use examination results to enhance your compliance program:

• Lessons learned documentation

• Policy and procedure updates

• Training program enhancements

• Technology system improvements

Half of advisory firms expect new SEC rules to push their annual compliance costs to $100,000 or more. Investing in examination readiness can help manage these costs by preventing violations and enforcement actions.

Industry-Specific Considerations

Private Fund Advisers

In 2023, 5,390 exempt reporting advisers filed with the SEC (and another ~3,940 at states), collectively managing over $6 trillion in private fund assets. Private fund advisers face additional examination focus areas:

• Valuation procedures and controls

• Fee and expense allocation

• Side letter management

• Investor communication procedures

Dual Registrants

Firms registered as both investment advisers and broker-dealers need comprehensive documentation addressing:

• Capacity disclosure procedures

• Conflict identification and management

• Fee structure explanations

• Suitability vs. fiduciary standard application

Emerging Managers

Smaller and newer advisory firms should focus on:

• Scalable compliance procedures

• Cost-effective monitoring systems

• Growth-oriented policy frameworks

• Technology integration planning

Final Thoughts and Next Steps

Preparing for a 2025 SEC risk-based examination requires more than just having the right documents. You need to demonstrate that your compliance program is living, breathing, and actually working to protect your clients and your firm.

The examination landscape has shifted toward technology-driven, risk-focused reviews that dig deep into your actual practices, not just your written policies. By law, investment advisers must place client interests above their own, and examiners are increasingly sophisticated in evaluating whether your systems and procedures actually support this fiduciary obligation.

Start your preparation now, not when you receive an examination notice. Use this checklist to identify gaps in your current program, and remember that examination readiness is an ongoing process, not a one-time event. (What is a Compliance Checklist)

The regulatory environment will only get more complex, and the cost of non-compliance continues to rise. But with proper preparation and the right tools, you can turn examination readiness from a burden into a competitive advantage.

If you're looking to streamline your compliance processes and reduce the time and effort required for examination preparation, consider exploring AI-powered compliance solutions. Luthor provides real-time monitoring, review, and automated alerts for compliance risks, helping firms stay audit-ready while focusing on serving their clients. Request demo access to see how automated compliance workflows can transform your examination readiness and reduce your overall compliance burden.

Frequently Asked Questions

What are the key focus areas for SEC examinations of investment advisers in 2025?

The SEC's 2025 examination priorities focus on AI usage and governance, updated Regulation S-P privacy requirements, cybersecurity resilience, and ESG-related disclosures. With over 15,396 SEC-registered firms managing approximately $128 trillion in assets, the SEC is conducting more targeted, risk-based examinations to ensure compliance with evolving regulations.

How should RIAs prepare for questions about AI usage during SEC examinations?

RIAs should document their AI governance frameworks, risk assessments, and oversight procedures. Examiners will likely ask about how firms identify AI usage across operations, what controls are in place to manage AI-related risks, and how firms ensure AI tools don't compromise fiduciary duties or create conflicts of interest.

What documentation should investment advisers have ready for a risk-based SEC examination?

Key documentation includes updated compliance policies and procedures, annual compliance reviews, cybersecurity incident response plans, privacy notices reflecting Reg S-P changes, AI usage inventories, and records of staff training. Firms should also prepare client communication records, marketing materials, and evidence of ongoing compliance monitoring activities.

How can compliance technology help RIAs prepare for SEC examinations?

Modern compliance platforms like Luthor provide real-time monitoring, automated alerts for compliance risks, and comprehensive documentation management. These AI-powered workflows help firms maintain continuous compliance readiness, with some platforms trusted by leading firms managing over $6.8B in combined assets under management.

What are the potential consequences of failing an SEC risk-based examination?

In 2024, the SEC ordered financial companies to pay $8.2 billion in fines and penalties, representing a 67% increase from 2023. Failed examinations can result in enforcement actions, monetary penalties, operational restrictions, and reputational damage that can significantly impact an RIA's business operations and client relationships.

How often should RIAs conduct internal compliance reviews to prepare for SEC examinations?

RIAs should conduct comprehensive annual compliance reviews as required by regulation, but best practices suggest quarterly internal assessments and ongoing monitoring. Regular internal reviews help identify potential issues before SEC examinations and demonstrate a firm's commitment to maintaining robust compliance programs throughout the year.

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