RIA in a Box, a provider of compliance and regulation technology for advisers, has a new tool to help registered investment advisers prepare for audits and examinations.
Collecting data on audits from the 1,700 RIAs using the firm's technology, the Audit Prep tool shows advisers what they can expect from Securities and Exchange Commission and state regulator information request letters. The tool pulls together findings from firms that have been audited in the past, and where issues were remedied.
A library of documents and on-demand webinars outlines exam priorities and common deficiencies for compliance teams to create best practices regarding the audit process. The tool also creates calendar reminders for advisers to ensure examination materials are reviewed annually.
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When an audit occurs, the tool helps compliance teams streamline the information gathering and makes sure there are no gaps. For example, the tool will check that any deficiencies in a previous audit were properly addressed.
GJ King, president of RIA in a Box, said a common issue that firms encounter is not keeping proper books and records because they aren't aware of what regulators want. By telling firms what will likely be requested, compliance teams "aren't trying to create books and records right when the audit comes," Mr. King said. "They are ready to go so its easy to prepare and respond to an audit."
After an exam, the audit is logged in the system, and RIAs can used the Audit Prep tool to upload relevant documents or letters.
"Going through an audit is one of the most stressful things we see our clients experience," Mr. King said.
Particularly challenging is accounting for drastic differences between each state regulator. Thanks to a new integration with
Morningstar, RIA in a Box can automatically check where all clients are located and ensure that RIAs have all the proper registrations, Mr. King said.
But even federal audits, which used to be mostly standardized, are changing.
"As the SEC is making better use of data and becoming better focused, they are channeling their requests to be a lot more tailored to the firm," Mr. King said.
Firms across the industry are increasingly turning to tools like this to keep pace with evolving regulatory requirements,
according to a recent report from the
Financial Industry Regulatory Authority. While regulatory compliance tools, or regtech as Finra calls them, can benefit firms, markets and investors, they also raise new challenges.
For example, firms are required to have control systems in place to supervise and govern the tools they use, but some regtech may rely on sophisticated algorithms that go beyond a firm's technical skill.
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More:
Increase of enforcement cases against RIAs, advisers suggest compliance may need a boost)
Finra also pointed out that like all third-party technology, relying on a vendor for regulation and compliance also creates new cybersecurity risks and concerns around client data privacy.
"Firms are reminded that outsourcing an activity or function to a third-party does not relieve them of their ultimate responsibility for compliance with all applicable securities laws and regulations and Finra rules associated with the outsourced activity or function," the report reads.
Finra recommends firms evaluate their technology governance structure, maintain a simplified summary of the regtech tools they use that describe the underlying algorithms and strategy, develop a data quality risk-management program, have a process for identifying and addressing errors, and train personnel in how to use regtech tools.
(More: For first time, state regulators pursue more cases against RIAs than against broker-dealers)
While Finra's report is tailored to broker-dealers using regtech, Mr. King said the ecosystem is even more complicated for RIAs, where there is less clarity around what is required for compliance. RIAs also tend to have smaller teams and fewer resources dedicated to compliance.
"Most regulatory and compliance technology today has been primarily built for broker-dealers," Mr. King said. "When you transition that to RIA firms, it's a clunky fit and doesn't exactly work properly."
While the RIA community has plenty of technology to meet its other needs, Mr. King sees compliance as one of the last uncovered frontiers for automation, and an opportunity.
"It's a gap in firms' tech stacks," Mr. King said. "But we see more adoption and more willingness."
