If the firm's compliance program is dynamic and you have been keeping on top of compliance issues, you have nothing to fear. If there are areas that have not been addressed, you should still respond accurately and appropriately to the examiner and address what steps you will be taking in the near-term. That being said, we generally recommend you consider working with an experienced securities attorney when preparing for an SEC examination.
We often are asked what steps should firms take in preparing for an exam. Here are our top tips to consider before and during the SEC Examination process.
1. Know Your Compliance Policies and Procedures Top to Bottom
Although this might seem obvious, nothing can look quite as bad during an SEC Examination as a firm whose management, leaders, and employees are unclear on their own compliance policies and procedures.
If you want to make a good impression on SEC examination staff, spend the time necessary to review the policies and procedures for those areas within your responsibility. Check with your managers and other employees to ensure that the procedures outlined within the Manual reflect actual practices. While ideally this should be done on a periodic basis (no less than annually) anyway, this is a good exercise to help the firm identify what needs to be updated, which can be communicated to the examiners. Preparation is the key here. A firm that is well prepared, that is knowledgeable about their policies and procedures and can articulate their internal control structure with ease generally provides a great first impression in the eyes of SEC examination team.
2. Establish Points of Contact for Interviews
While your CCO typically serves as the primary point of contact for SEC staff during any examination, certain employees will be of particular interest for the examiners to interview in order to gain a better understanding about the internal operations of the organization. Mapping out in advance who will be points of contact and what they will be responsible for is key to a successful examination.
While it is critical that all employees are well prepared to meet with the SEC Staff, when designating who should be the point of contact for the interview, it is critically important to designate the employees who are the most appropriate and knowledgeable in that particular area.
Simply because someone is a manager of a particular area of your business does not mean they are the most appropriate person to speak with SEC Staff - or that they will be able to handle the pressure. Whenever possible, ask the examiners what specifically do they want to accomplish learning about so that you can help to Identify who would do best as the point of contact for that particular interview.
3. Prepare Your Employees to Meet with SEC Staff
Anxiousness and stress is a common reaction for those employees who learn that they have been identified to meet with the SEC staff during the onsite portion of the examination. As alluded to in our first tip, preparation is key, and ensuring your managers and employees are ready for this experience is crucial to coming out of an SEC Examination successfully. We strongly recommend that prior to meeting with the SEC staff that you, or an experienced securities attorney, conduct a mock SEC exam interview to help the employees to be ready for this high-stress situation.
Many firms conduct mock exams from year to year to ensure every member of the team knows what they need to do when the time for a real SEC exam comes. This will help them get used to the types of questions that might be asked, including new regulatory focus areas, so that they are aware of the type of information they need to have ready and be prepared to convey to the examination team.
4. Create an Opening Presentation for SEC Staff
Consider creating an opening presentation specifically for SEC Staff that clearly outlines who you are, what you do (and do not do), diagrams your firm's organizational and internal control structure and highlights the demographics of your clients and services provided to them. Simple-yet-critical pieces of information that will help SEC Staff structure their examination include, but are not limited to:
- Overview of your organization
- Products and services offered
- Your firm's internal control environment
- Statement about your compliance culture
- Your daily processes and workflows used to maintain compliance
- Any other material information to assist the staff
Your goal here is to demonstrate to the SEC Staff that you are actively striving for them to understand your firm and its operations, including the dynamics of the compliance program. From the beginning, if your firm is open, honest, and clear about its operations and internal control structure, how things work and near-term plans to advance your compliance program (including a clear path to rectifying any issues identified), your exam is going to go more smoothly.
From our experience, the more time a firm spends on preparing for the exam, including providing an opening presentation, the more likely it is for you to make a strong first impression by being forthright, articulate and prepared, making it less likely examination is going to evolve into something more problematic.
5. Triple Check Your Documents
Finally, take the time to ensure all of your documentation is in order. Your goal here is to reduce the amount of time the SEC Staff must spend trying to find the information they seek. Ensure all your documentation is clearly labeled, that you've created duplicate (and even triplicate) copies of all relevant documentation, and that, for initial and supplemental production, all documents are easily accessible while the staff is onsite.
You may also consider drafting a narrative document that clearly defines your internal controls, including a synopsis of your training program, your policies and procedures, and periodic review structure that serves as a "snapshot" overview document that helps SEC Staff to see everything at once.
This Is Only a Beginning
Unfortunately, this list is woefully short of all the granular steps that must be taken to ensure a successful SEC Examination. Only partnership with a well-experienced team of professionals can ensure that everything goes smoothly.
If you have an upcoming SEC Examination, contact us today to discuss how we can help.
Add a comment
- SEC Releases Last-Minute Updates to Form CRS FAQs
- Top 3 Considerations During the Breakaway & Transition Process
- Succession Planning: Identifying a Successor
- California AG Submits Final CCPA Rules for Approval
- ICO To Return $25 Million to Investors
- SEC Charges Morgan Stanley Smith Barney with Providing Misleading Information to Retail Clients
- FINRA’s Senior Help Line: Celebrating 5 Years of Providing Protection
- How To Start: Are You Evaluating Your Firm’s Whistleblower Policies?
- Three Firms’ Failure to Disclose Conflicts of Interest Lead to Almost $1 Million in Disgorgement, Interest
- OCIE Risk Alert—Examinations Focused on Initial Compliance With Regulation Best Interest
- Investment Advisers
- Securities and Exchange Commission (SEC)
- Due Diligence
- Aging Clients
- Transition Services
- Policies and Procedures
- Broker Protocol
- Virtual Currency
- California Consumer Privacy Act (CCPA)
- Dodd-Frank Act
- Advisers Act
- Securities Law
- Office of Compliance Inspections and Examinations (OCIE)
- Ponzi Scheme
- Form U5
- Private Equity
- Private Funds
- Regulation Best Interest
- Hedge Funds
- Regulatory Examinations
- Personally Identifiable Information (PII)
- Government Shutdown
- Risk Alert
- Social Media Marketing
- Exchange-Traded Funds (ETFs)
- Investment Company Act
- Rule 6c
- Wells Fargo