Never been examined? If you’re an RIA, this might be the year

This month, the Securities and Exchange Commission (SEC) disclosed additional details about its 2014 plan to focus on examining an estimated 4,000 registered investment advisors who have never been visited by regulators.

Called the “Never-Before Examined Initiative,” the SEC’s plan includes two separate tactics that will help the regulator engage with never-examined investment advisors, especially those who have been registered with the SEC for three years or more and are based in the U.S.

The first tactic is to assess risk, and the second is to conduct focused reviews.

According to the letter sent by the SEC to unexamined advisors, risk assessment will include steps to obtain a better understanding of the registered advisor, and may involve a high-level review of their business activities—with an emphasis on their compliance program and other critical documents required to assess representations made on disclosure documents.

Focused reviews will consist of the SEC taking a look at advisors’ compliance programs, filings and disclosures, marketing, portfolio management, and protection and care of client assets.

The letter is a follow-up to the SEC’s October 2013 announcement, which stated the SEC would hone in on approximately half of the firms that haven’t been examined. Andrew J. Bowden, director of the SEC’s Office of Compliance, clarified that firms in the unexamined category would have a greater probability of being examined in 2014 than in previous years.

The SEC oversees approximately 11,000 advisors, of which 40% have never been examined. However, the SEC says about half of that 40% have been registered for under three years, and about 600 are not based in the U.S.

Bowden emphasized the commission’s approach is meant to prevent lapses in reviews and promote compliance, rather than alarm advisor’s with enforcement actions.