Considerations for Never Before Examined Investment Advisers

Considerations for Never Before Examined Investment Advisers


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Full video transcript available below:

Hello and thank you for joining today's webinar Best Practices to Master an SEC Exam. Our presenters today join us from Northpoint Compliance, Victoria Hogan and Colleen Montemarano.

These results lead to our next topic because you'll see the focus is on never before examined advisers and also those that haven't been examined recently.


Colleen, that would be about 50% of the audience would fit into one of those two categories based on the polling question we just had.


Yes, you're right. And to the never before examined and those of you that haven't been examined within the past five years. Once again, the exam priorities included the never before examined advisers. This initiative includes focused risk-base exam for newly registered advisers. Then, this year we also saw them add investment advisers who have not been examined in some time. With the focus over the past few years been on never before examined, some of the longer registered advisers have not been examined in quite a while. I know among our clients, Vicky and I have seen that those advisers who have registered in the past two to three years, have been examined. But we've also seen in some of our clients who have been registered for quite a while, have not been examined in 10 plus years.


In 2017, the National Exam Program completed more than 2100 exams of investment advisers, and this was actually an increase of over 46% from 2016. So we're seeing quite an increase in the number of exams being done. I think because of this, next year, if we were to ask this question again we would see an increase in the number of you have been examined recently as opposed to those of you who have never been examined or haven't been examined in quite some time.


I think the increase in the SEC exam could be attributable to the more focused risk-based examinations that they're conducting now. This is actually quite a change from when Vicky and I first were at the SEC when all of our exams were full scope and quite frequently unannounced. I think people are happy that that has changed. And among our clients we've seen an increase in correspondence exams where the examiners are conducting an off-site exam focusing on a few high-risk areas. The request list may only have a few items. Most of the time the advisers are given about a week to respond, however, you never know if you are going to get a full scope exam, so it's always best to be prepared. Some of the ways you can prepare is gathering responses to a full SEC request list. This can be a very helpful exercise.


If you don't have a copy of a request list, you can usually find them online. This exam allows you to learn how long it will take to retrieve information. Sometimes I see ... Well, you have the capability of more [inaudible 00:29:23] emails. You might find that trying to download a timeframe of emails can be difficult or you may have a system that has your trade blotter, but actually downloading a year or two years worth of trading information can pose some problems.


Another thing that's good is self-gathering the documents in response to a request list as you can document where the information is stored for future retrieval. Going through the request list and preparing the responses gives you a chance to work out any kinks before the SEC actually arrives or before you receive a request from them. If you'd like to take it a step further, one of the things you could do is conduct the mock audit. This can be done either internally or through a third-party consultant, and this would be what the SEC would mostly likely find if they would have come in and conduct an examination today.


Another tip is interview key personnel. For example the SEC may ask to speak with your head trader, portfolio manager, chief financial officer. So it's a good practice to interview them. I recommend that you really grow them to ensure that they remain calm and answer the question at hand. This can be especially important given the amount of remote examinations we're seeing, 'cause I think interviewers can be harder over the phone when you can't read someone's body language. That's definitely important to make sure that they remain calm and have a friendly tone. When employees are interviewed by the SEC, you want to be sure that they fully answer the question asked, but you do not provide additional information.


Also, it's okay that if you don't know the answer to a question, to direct the SEC to another individual at the firm. Often it can cause confusion. If somebody tries to answer something when they're not quite sure, it can result in issues with the exam staff. And then after completing these interviews, you want to review the responses and look for consistency among what your employee said, your ADV and your compliance manual. If you do see some inconsistencies, this is the time where you need to decide whether you want to update your ADV, change your compliance manual or change the practice at hand.

Another thing you want to do is ensure that all compliance issues are documented in a timely manner. You want to make sure that you're able to recall details and show how you've handled compliance issues quickly. The SEC may come in and ask about per up to five years back, and two years from now you may not remember the details of somebody who violated the code of ethics or of a trader you had, so you want to be sure that you carefully document these.


This webinar was co-hosted with Victoria Hogan and Colleen Montemarano of

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