Knock knock. Who’s there? The Securities and Exchange Commission

Jul 5th 2016 - by Patrick Adrian, CFA

Practice Management

An SEC Examination is no joking matter for a Registered Investment Advisor. In a very real sense, everything a firm has worked for and hopes to achieve is on the line. The SEC regularly issues press releases when there is a breach of the Investment Advisors Act of 1940 ( “40 act” ), not to mention we all know bad news travels fast in the press and internet. Disclosure of violations is also required with all prospective clients and current clients on the form ADV. Additional scrutiny in the future is also a likely outcome. All of this is to say, business just got really difficult if not impossible.

At RedQuarry, we built features into our software to help alleviate the compliance burden, reduce risk, and help our clients focus on their core business.

Doing everything in one’s power to prevent a violation in the first place is the name of the game. A breach is not inevitable, but an examination is. An SEC study in 2011 estimates that an adviser can expect an examination every 5-10 years. 1 Additionally, a recent InvestmentNews article reported a planned increase in examiners by 20% in 2016. 2

RedQuarry interfaces with our users’ compliance programs as it relates to research, specifically delivering investment recommendations to clients. Our goal is to help make compliance in the research department trivial by enabling firms to retrieve information quickly and demonstrate best-in class professionalism.

SEC Fiduciary Standard: Reasonable Basis for Recommendation

The extent of an adviser’s fiduciary duty is an ever evolving legal topic. However, according to the non-profit adviser advocacy group, Investment Adviser Association (IAA) 3 :

“Under current law, investment advisers are subject to a stringent overarching fiduciary duty that requires investment advisers to act in the best interests of clients and to place the interests of clients before their own.”

One key tenant of the SEC Fiduciary Standard according to the IAA is to have a reasonable basis for investment advice. In other words, be able to backup your recommendations with relevant facts, figures, and any other important information.

One common scenario we hear about from RedQuarry users is the SEC examiner requesting to walk through selected due diligence files for investments currently or previously in client accounts. Since RedQuarry is a digitized central repository for this exact task, our client firms have been able to quickly demonstrate reasonable basis in addition to adhering to a consistent investment process via rankings, recommendation documents, and due diligence rules.

In short, having an organized system like RedQuarry not only helps meet a specific request from an examiner, but also signals a best-in class process for managing due diligence. Through the rumor mill we are hearing that examiners are becoming increasingly aggressive and we think the best defense is a good offense. In the case showcasing competence beyond what is typically found in the industry is a great offensive approach.

In the next installments we will explore how RedQuarry assists in meeting requirements around record-keeping, disclosures, and take a look at an actual examination of a firm that uses RedQuarry.


RedQuarry's cutting edge research management software is used by leading investment firms around the world to manage their investment process, due diligence files, documents, reporting, and research compliance.