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SEC Exam Success with the Ex-Examiners

The Pre-Examination Process and First Steps in Preparing for a SEC Exam

MyComplianceOffice presents our co-hosts from NorthPoint Compliance as they explain the pre-examination process and first steps in preparing for a SEC Examination. 

Victoria Hogan, CFA, President of NorthPoint Compliance worked for over six years as a compliance examiner in the New York Regional Office of the U.S. Securities and Exchange Commission. Victoria also spent two years as a compliance officer at Fortress Investment Group. Victoria graduated magna cum laude from The College of New Jersey.

Colleen Montemaraon is a consultant at NorthPoint. Prior to joining NorthPoint, Colleen worked for more than six years as a compliance examiner in the New York Regional Office of the US Securities and and Exchange Commission.Colleen graduated magna cum laude from St. Thomas Aquinas College with a BS in Finance.

 You can download a full copy of the slides from this webinar.

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Full video transcript available below:

I am going to go over the pre-examination process. You want to know what the SEC does to prepare for an exam so you can mimic these activities. This will reduce your risk of a lengthy deficiency letter or even possible referral to enforcement. Also in the SEC, we'll find deficiencies before they even contact you. First they will review part 1 and 2a of form ADV to get a feel for the firm, what types of services you offer and what are your high-risk areas. They will also check to make sure parts 1 and 2 are consistent with one another, and that your part two contains all of the required information.

This is a pitfall that we see time and time again, and what we refer too as low hanging fruit that could show up in your deficiency letter. Also make sure that all conflicts of interest are clearly set forth in form ADV as the SEC will be looking for undisclosed conflicts of interest. Failure to disclose conflicts of interest is just one area that can lead an examination to an enforcement action. In addition, the SEC will review your website to look for consistency with disclosure on form ADV and compliance with marketing rules. Be especially cautious to ensure that you have all appropriate disclosures if you include performance information or make reference to ranking or ratings on your website. Many advisers forget that your website is one of the first things the SEC is reviewing during and exam, and you want to make a good first impression.

They will also search your firm and key personnel on the internet. It is a good idea to set a Google alerts for the firm and key personnel so you are aware of all web content. Examiners will also review LinkedIn pages. If you don't already do so, I suggest periodically reviewing these pages to ensure the content follows SEC marketing rules and your compliance policies and procedures. In our assessing with our own clients, we have found instances where what employees disclosed on LinkedIn pages and elsewhere is wildly out of line with what is permitted by compliance policies and procedures.

The SEC also assigns a risk rating to each adviser based on your responses to from ADV and your previous exam if there is one, although the exact basis for the rating and your firm's specific rating is not public. Examiners will also review your previous exam reports and response letters. During the current exam, they review to see if you have corrected previous deficiencies and on following the steps you said you would take in your response. If you get nothing else from this presentation and have been examined in the past as it seems most of you have, please go back to review your response to any prior deficiency letter. Again, this is low hanging fruit. Another thing that they do is review CRD and Lexis-Nexis for the firm and key personnel to see if you have been a subject of any litigation or have any past SEC or FINRA violations.

 

You get the phone call, the one most CCO's are dreading, or some are actually hoping for just to get it over with. After the SEC contacts you to inform you of an examination, you will be provided with a document request list. This may be a full request list which may consist of upwards of 65 items, or a more focused list with as few as 10 items. We are seeing, at least from our clients who have been recently examined, more limited request letters. That of course does not mean there won't be additional follow up request, or that the exam may not lead to a full scope examination.

Generally the review period for an exam is one to two years but may vary. You will have about one to two weeks to produce documents. We have been seeing requests for graduated document production which asks for some documents to be provided immediately such as ADV part 2b and your compliance manual. A second production a week later, and a third production perhaps two week later or when the SEC starts an onsite examination. Depending on the type of examination, the examiners will schedule either an onsite visit or a phone interview.

I also want to add there is not point in asking whether the examination is routine or cause because they can't tell you. It just makes for an awkward conversation and can leave a bad taste in the examiners mouth because they are wondering why you might suspect a cause exam.

Responding to a request list is a very important task. The matter in which you respond sets the tone for the examination. For example, it will point to the cooperation that the SEC can expect from you during the examination and the seriousness with which you are taking the process. Believe it or not, when we were examining folks who would often complain about the system or unnecessarily give push back on request, it made the process frustrating and longer. You should designate an individual or a team in-charge of collecting all of the documents.

You want to ensure the documents are presented in organized manner and carefully tracked what has been provided. You also want to be sure the number of responses to match the request list. You would be surprised how many people don't do this, it makes reviewing the documents much easier for the staff and will help move the examination along. You want to get the staff out of there as soon as possible. Some items on the request list will ask for several pieces of information, be sure to respond to each request. 

As an examiner, I find it frustrating when a firm only provided part of a response or provided responses to a single question in multiple documents. For example, a client list has approximately nine or so items, often firms would only provide five or would provide five in one spreadsheet and four in another. This then causes the staff to have to come back and request the missing information, which again prolongs the exam. If you need clarification from the SEC, be sure to ask prior to providing a document that you think the staff wants. It is better to ask than to provide the wrong response.

While the SEC tries to request list, these are general questions and may not apply to your firm, or your firm's response may be different than typical especially if you were not a plain vanilla adviser. For example if you invest in private funds, your trade blotter will not have symbols even though they will be requesting one. You also want to make sure that someone other than the person providing the documents reviews them. They should compare the documents to the request list to ensure it is fully responsive, and also review for any errors, you don't want to appear sloppy.

Finally, while many items will be required books and records under rule 204-2, some are best practice. Provide the documents if you have them, but don't create something just to give it to the SEC. The last thing you want to do is appear deceptive. Be as genuine as possible in your responses. Also evading question is a red flag for SEC examiners. If you don't have something, just tell them.

 

 

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