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Ext. PublicationRIA Surprise Examinations: What to Expect During the Exams
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For many registered investment advisers (RIAs), surprise examinations can feel intimidating because the process is unpredictable. It’s not always clear when the exam will occur, what period it will cover or what the accountant will be looking for once it begins.
By understanding the timing and the specific procedures performed, advisers can better prepare their records and anticipate requests. This helps reduce uncertainty, making the examination feel less daunting and more like a structured compliance step that can be managed with confidence.
What Is a Surprise Examination?
Unlike an audit of historical financial statements, a surprise examination focuses on compliance. Specifically, the accountant is rendering an opinion on management’s assertion regarding compliance with certain rules of the Investment Advisers Act of 1940 being paragraph (a)(1) of Rule 206(4)-2, Custody of Funds or Securities of Clients by Investment Advisers as of a specified date and Rule 204-2(b), Books and Records to be Maintained by Investment Advisers for the specified period.
The outcome of this engagement is an Independent Accountant’s Report, accompanied by a Management Statement Regarding Compliance signed by the adviser to affirm adherence to the rules.
The “surprise” element comes from timing. The examination date is chosen by the accountant without advance notice to the adviser, and it must vary from year to year, making the process intentionally unpredictable.
How the Exam Period Is Determined
The examination begins when your accountant selects a specific date for the examination. This date is chosen without advance notice to you, and the examination period covers the time from either your last examination, or in the case of a new RIA, the date you became subject to the custody rule.
For newly registered advisers, the first surprise examination must occur within six months of becoming subject to the custody rule.
Deadline for Filing
After the examination date is set, the accountant must complete the exam and file the Form ADV-E with the Securities and Exchange Commission (SEC) within 120 days.
Below are two examples illustrating how the exam period and report deadlines work:
Example 1: A new RIA
- An RIA registers and becomes subject to the custody rule on December 19, 2024.
- The accountant selects an examination date of April 30, 2025, and notifies the adviser on May 1, 2025.
- The examination covers the period from December 19, 2024, through April 30, 2025.
- The final report is due August 28, 2025, 120 days after the exam date.
Example 2: Switching from an audit to an exam
- An adviser had an independent public accountant, subject to the Public Company Accounting Oversight Board (PCAOB) inspection, audit its financial statements in accordance with US GAAP for the year ending December 31, 2024.
- Starting in 2025, the adviser engages a qualified custodian and chooses a surprise examination instead of a financial audit.
- The accountant selects April 30, 2025, as the exam date and notifies the adviser on May 1, 2025.
- The exam period covers January 1, 2025, through April 30, 2025.
- The final report is due on August 28, 2025.
What Happens During the Exam?
One question RIAs may have is, “What will the accountant actually do during a surprise examination?” While every exam may vary slightly, accountants generally follow a set of procedures designed to confirm the existence of cash and securities and verify that internal records are maintained.
The procedures performed by the accountant often include:
1. Confirmation of cash and securities with custodians: The accountant contacts the qualified custodian to confirm assets held for clients, either under the RIA’s name or as agent/trustee.
- Client account statements are sent directly to the accountant, serving as primary evidence that the firm complies with paragraph (a)(1) of Rule 206(4)-2.
- If a firm fails to engage a qualified custodian by the exam date, it can create a material discrepancy, which must be reported to the SEC within one business day.
- A common question in this step is, “If a custodian wasn’t used during part of the period but is in place on the exam date, does this count as a discrepancy?” The answer is no. The focus is on compliance as of the exam date, though best practice is to ensure custody arrangements are established promptly.
2. Confirmation of privately offered securities with issuers: For privately offered securities, the accountant verifies holdings by contacting the issuer.
- Typically, via email, the accountant confirms the client’s investment exists, such as a limited partnership or membership interest.
- Alternative procedures are used if the issuer does not respond, including:
- Agreeing ownership to a partnership or membership agreement, subscription agreement or comparable governing document
- Vouching transactions in the underlying security to the company’s bank statements
- Scanning bank statements for transactions or realized investments not recorded in accounting records
- Cash balances may also be confirmed using financial institutions directly or through services like confirmation.com.
- For multiple funds or SPVs, accountants may sample or stratify accounts, so not every investment or cash account is confirmed directly.
3. Reconciliation to the company’s books and records: The accountant reconciles confirmed balances of cash and securities to the firm’s internal accounting records to ensure completeness and accuracy.
- Fair value is not tested during a surprise examination, and US GAAP financial statements are not required.
- The objective is to confirm that investments recorded in the books exist and are accurately reflected in internal records.
4. Confirmation with investors in pooled investment vehicles: For funds or SPVs, the accountant may confirm contributions and withdrawals with investors.
- Confirmations are sent directly to investors to verify their capital activity and ownership for the exam period.
- The accountant selects which investors to confirm, which can be a full or sample selection.
- Confirmation responses are reconciled to the company’s books.
- If investors don’t respond, alternative procedures may include:
- Vouching cash receipts or disbursements to bank statements
- Verifying distributions align with subscription documents or recalculating amounts
- Confirming holdings against investor subscription agreements
5. Other procedures at the accountant’s discretion: Accountants may perform additional procedures to obtain sufficient evidence:
- Requesting supporting documentation for selected transactions from the general ledger
- Testing individual transactions from bank statements to ensure proper recording
- For significant realization or liquidation events, verifying distributions match investor allocation schedules and agreements
Key Takeaways
Understanding the process of a surprise examination is the first step toward being fully prepared. The exam focuses on a series of key procedures, including confirming assets with custodians and issuers, reconciling those assets to a firm’s records, and verifying investor activity. While the timing may be a surprise, the procedures themselves are not. By maintaining accurate and complete books and records, a firm can ensure a smooth process and avoid potential issues, protecting both its investors and the business.
With the right preparation, surprise examinations become more manageable and less stressful. Contact us. Weaver can help RIAs meet custody rule requirements while streamlining the process for greater efficiency.
©2025
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.
