RIA Surprise Examinations: What RIAs Need to Know

Registered investment advisers (RIAs) that manage pooled investment vehicles — such as private funds or special purpose vehicles (SPVs) — face ongoing scrutiny under the SEC’s custody rule. Compliance isn’t optional, and failing to meet the rule’s requirements can lead to deficiency letters or even enforcement actions. Yet, many RIAs remain unclear about how the rule works in practice, especially when it comes to surprise examinations.

Understanding the role of surprise examinations and how the custody rule works in practice helps RIAs protect investors, avoid regulatory issues and choose the most efficient compliance path.

What the Custody Rule Requires

Under Rule 206(4)-2 of the Investment Advisers Act of 1940, client assets must generally be maintained with a qualified custodian. Those assets must also be independently verified by a public accountant through a surprise examination unless the adviser qualifies for the widely used audit exception.

This audit exception allows RIAs to bypass the surprise exam requirement if their pooled investment vehicle undergoes an annual financial statement audit in accordance with U.S. GAAP. The audit must be conducted by a Public Company Accounting Oversight Board (PCAOB)-inspected public accountant, and the audited statements are distributed to investors within 120 days of fiscal year end.

Why Surprise Examinations Matter

For many RIAs, obtaining a full audit isn’t always practical, especially for smaller funds or SPVs. In these cases, the more efficient path to compliance is to maintain assets with a qualified custodian and undergo a surprise examination.

The surprise element is intentional. The accountant selects the examination date without prior notice and must vary it each year.

How Surprise Examinations Differ from Financial Audits

A surprise exam is not simply a scaled-down audit. Rather, the objectives are different:

• Surprise exam: Verifies compliance with certain provisions of the Investment Advisers Act of 1940, including paragraph (a)(1) of Rule 206(4)-2 “Custody of Funds or Securities of Clients by Investment Advisers” and Rule 204-2(b) “Books and Records to be Maintained by Investment Advisers”
• Financial statement audit: Provides investors with financial statements including valuations, performance and disclosures

A financial statement audit is broader in scope and covers fair value, investment performance and detailed disclosures. A surprise examination is narrower, focusing instead on verifying the existence of assets, proper custody arrangements and recordkeeping.

Key Takeaways

Surprise examinations provide a cost-effective compliance option for RIAs that don’t require full financial audits but still safeguard client assets and ensure adherence to SEC rules. For RIAs, understanding the differences between an audit and a surprise exam and knowing when each is required is the first step toward building a compliance strategy that satisfies regulators and instills investor confidence.

Ready to strengthen your compliance approach? Contact us. Weaver can help you evaluate whether a surprise examination or audit is the right path forward.

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RIA Surprise Examinations Series

This article is part of a series designed for RIAs who manage pooled investment vehicles, such as private funds or SPVs, and need to comply with the SEC’s custody rule. From compliance officers and fund managers to CFOs and operations leaders, this series provides RIAs with practical guidance on surprise examinations, helping them protect investors, meet regulatory expectations and choose the most efficient compliance path.

• RIA Surprise Examinations: What to Expect During the Exams