Tips on How to Produce the Right Document for an Examination

Firms registered with the U.S. Securities and Exchange Commission (SEC), should regularly ask themselves when – not if – they will be examined. With that in mind, the team at Jacko Law Group, PC (“JLG”) has a few best practices on how to prepare for the SEC’s inevitable request for document production.

From the outset, you should have two goals:

  1. Provide only what the SEC has requested, and
  2. Include information that underscores the effectiveness of the policies and procedures of your compliance program. Documentation should demonstrate how your firm’s processes have been designed to ensure effective compliance with industry regulations.

Don’t Overcomplicate, Overprovide, or Overdeliver

Make certain your production process is responsive to the SEC request(s), but remember to simplify and be direct with your responses. With only one or two specific exceptions, this is not the time to go the extra mile and hand the SEC the keys to your compliance files.

Recently, we were approached by a firm that had not performed its annual cybersecurity risk assessments for a few years. In fact, they kept leaving the form amongst their records blank, which may allude to incompletion. We’ve also seen cases where clients would rather have their teeth pulled because they are overprotective of information. But any avoidance of regulator requests is a grave mistake.

TIP: Chief Compliance Officers (CCOs) should review the document list more than once. Also, seek any clarification, as necessary, regarding any of the items the examination team has requested. If you have any questions about the relevance, applicability, or scope of the request, don’t hesitate to ask the examiners. Or firms can also seek additional guidance from experienced regulatory counsel. The assumption for what you think the SEC may be requested may lead to additional requests, interviews, or inaccurate responses.

TIP: Also, If this is not your firm’s first exam, review prior deficiency letters. Be prepared to confirm how and when those deficiencies have been addressed and why they no longer present an issue.

Make Certain Your Firm Provides All Requested Documents properly labeled and in the order requested.

The SEC will provide ample information regarding how and when they want the information provided and formatted.

Initial Documentation
Typically, initial documentation is requested before the exam begins. Firms must be prepared and submit documentation electronically by uploading all files in a secure manner with confidential data encrypted.

Note: For initial and supplemental production, remember that all documents should be Bates stamped and Freedom of Information Act stamped for ease of reference. These numbers will be referred to by the SEC during the exam and will be referenced on your firm’s privilege logs.

Onsite Documentation
Document production performed onsite should clearly identify the specific request to which the document is responding. The SEC often follows upon its initial request and asks for additional documentation. Should that happen, determine whether your firm will provide copies in hard or e-copy format. In either case, it is important to track what your firm delivered and when. In the event, hard copies are provided, make duplicate copies of all documents produced to SEC examiners so that they can be referenced by you and the firm’s counsel if anything becomes escalated.

Designate the CCO as the official document gatherer and onsite gatekeeper.

Much in the same way the CEO speaks with one voice when representing a firm from a business perspective, the CCO should be the main point of contact with the SEC staff before, during, and immediately after an exam. It’s imperative the CCO supervise, or at least be aware of, all written, electronic, and oral communications with examiners to ensure consistency of all responses.

Read more about How to Engage in Dialogue with an SEC Examiner.

The CCO should meet with senior management to discuss how the firm and its regulatory compliance have evolved since its previous exam.

TIP: As a best practice, the CCO should carefully review the disclosure documents the SEC provides at the onset of the exam, as they will lead to an understanding of the SEC’s lawful reach and prepare the CCO to recognize when it is exceeded.

Make every effort to meet all SEC deadlines for document production. Ensuring you have ample time to prepare is one of the most important things investment advisers can do prior to the SEC staff’s arrival.

Only ask for additional time from the SEC for extraordinary circumstances.

Have outside attorneys on your team with specialized knowledge and experience of the SEC exam process. If ever there was a time to seek outside legal expertise to protect your firm’s best interests, this is it.

Having counsel is important because what a client thinks isn’t always true. Attorneys don’t always know why the SEC is making a specific request, but they often have a good idea.

JLG has specialists who have guided many firms through challenging exams and worked to achieve best-case outcomes. Contact our team to discuss your situation and alleviate the related stress an SEC exam can bring.

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