Understanding SEC Sweep Examinations
Sweep examinations are coordinated, industry-wide reviews focusing on specific risk areas or business practices. Unlike routine examinations, sweeps target particular issues across multiple firms simultaneously, allowing the SEC to identify industry-wide compliance weaknesses and emerging risks.
For traditional RIAs in 2025, the SEC has launched targeted sweeps examining fee billing accuracy, portfolio management processes, and conflicts of interest disclosure. Understanding these focus areas is essential for effective preparation.
Fee Billing Practices Under Scrutiny
Common Deficiencies Identified
The SEC's fee billing sweep has revealed widespread deficiencies:
- Improper Billing of Fees: Charging fees on assets that should be excluded (cash, non-managed assets, closed accounts)
- Rate Discrepancies: Applying higher fee rates than those specified in client agreements
- Calculation Errors: Mathematical mistakes in quarterly fee calculations, often favoring the adviser
- Timing Issues: Charging fees on deposits before they're invested or on withdrawals after they occur
- Unclear Billing Methodologies: Form ADV disclosures that don't match actual billing practices
Testing Procedures Employed
SEC examiners are conducting detailed fee billing tests:
- Selecting random samples of client accounts and recalculating fees from scratch
- Comparing billed amounts to advisory agreements and Form ADV disclosures
- Testing controls around fee calculation, approval, and reconciliation processes
- Examining whether billing errors are investigated and corrected systematically
- Reviewing procedures for handling fee disputes and client inquiries
Portfolio Management Process Reviews
Investment Guidelines Compliance
Examiners are evaluating whether advisers actually follow stated investment strategies:
- Testing whether portfolio holdings align with client investment objectives and risk tolerance
- Reviewing exception reports for guideline breaches and how they're addressed
- Examining rebalancing practices and whether they're consistently applied
- Analyzing drift from model portfolios and the documented rationale for deviations
- Verifying that investment decisions are made by qualified personnel
Best Execution Obligations
The SEC is scrutinizing trade execution practices:
- Reviewing broker selection criteria and periodic best execution assessments
- Examining whether execution quality is monitored and documented
- Testing whether the adviser seeks competitive pricing on principal trades
- Analyzing soft dollar arrangements and their alignment with Section 28(e)
- Verifying disclosure of execution practices in Form ADV Part 2A
Conflicts of Interest Examination Focus
Proprietary Product Recommendations
When advisers recommend affiliated products, examiners are reviewing:
- Whether conflicts are clearly disclosed in client agreements and Form ADV
- The adequacy of due diligence comparing affiliated products to third-party alternatives
- Controls ensuring recommendations are in clients' best interests despite the conflict
- Whether clients are informed of revenue sharing or other compensation received
- Procedures for monitoring ongoing suitability of proprietary products
Third-Party Compensation Arrangements
The sweep includes detailed review of:
- Revenue sharing agreements with mutual fund companies and product sponsors
- Solicitor arrangements and compliance with the cash solicitation rule
- Referral fee agreements and whether they influence investment recommendations
- Conference sponsorships and marketing support from product providers
- Adequacy of disclosure regarding all forms of third-party compensation
Documentation and Books & Records Issues
Across all sweep topics, examiners are finding inadequate documentation:
- Missing investment committee or portfolio review meeting minutes
- Lack of written policies and procedures addressing identified risk areas
- Inadequate documentation of suitability analyses and investment recommendations
- Poor recordkeeping around client communications and complaints
- Insufficient evidence of annual compliance program reviews
Preparing for a Sweep Examination
Immediate Action Items
Traditional RIAs should take these steps now:
- Conduct Internal Fee Audits: Randomly select client accounts and verify fee calculations for accuracy. Investigate and remediate any errors discovered.
- Review Portfolio Management Controls: Ensure exception reports are generated, reviewed, and documented. Verify that investment guidelines are being followed.
- Update Conflict Disclosures: Ensure Form ADV Part 2A comprehensively discloses all conflicts, particularly around proprietary products and third-party compensation.
- Document Everything: Strengthen documentation practices for investment decisions, suitability analyses, and compliance oversight activities.
Enhanced Compliance Procedures
Consider implementing these enhanced controls:
- Automated fee billing reconciliation processes with independent oversight
- Regular sampling and testing of portfolio guideline compliance
- Periodic best execution reviews documented in writing
- Conflicts of interest committee to review recommendations of affiliated products
- Centralized tracking system for all forms of third-party compensation
Responding to Examination Requests
If selected for a sweep examination:
- Respond promptly and completely to document requests
- Organize materials logically to facilitate examiner review
- Prepare for detailed discussions about fee billing, portfolio management, and conflicts
- Have subject matter experts available (portfolio managers, operations personnel, CCO)
- Consider whether deficiencies warrant self-reporting before examiners identify them
- Engage legal counsel early if significant issues are discovered
Key Takeaways
- SEC sweep examinations are targeting fee billing, portfolio management, and conflicts of interest at traditional RIAs
- Fee billing deficiencies are widespread—conduct internal audits before examiners arrive
- Portfolio management testing focuses on adherence to guidelines and best execution obligations
- Conflict of interest reviews emphasize disclosure adequacy and controls around proprietary products
- Documentation weaknesses are common across all areas—strengthen recordkeeping practices now
- Proactive self-assessment and remediation can significantly improve examination outcomes