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SEC Exam Success with the Ex-Examiners

      Your Questions Answered with the Former SEC Examiners

      MyComplianceOffice presents our co-hosts from NorthPoint Compliance as they answer follow up questions from Compliance Officers on Best Practices for a SEC Examination during the Q & A session of our August Webinar. 

      Victoria Hogan, CFA, President, 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:

      We have some interesting questions and we appreciate everyone's participation. If we don't get to your questions to day, someone will reach out to you individually or please feel free to contact us.

      Looking at the first question here, a question that I like, it says, are the SEC employees incentvize to find things to refer to enforcement?

      I could take this one and tell you that myself as an examiner, SEC examiners are not against you, but they also take their job very seriously. I know that when I was at the SEC it was my charge to protect the investors, and so I didn't want to miss anything. That's an incentive alone. Also remember too, during an examination, if I didn't find anything at the firm, I had now have to answer to my supervisor who might say "what were you doing the whole time during the onsite portion of the exam? Are you shopping or were you really there?" There is an incentive too if you find deficiencies if they're there. I mean you can't create a deficiency, but if it's there you want to find it.

      There absolutely isn't incentive to refer items to the branches of enforcement. Internally it could be for not just the examiners but for the enforcement attorneys too. These are types of things that could be a career maker, and it will lead you to a potential promotion within the SEC. SEC examiners can't make folks have violations that would go to enforcement, but certainly if they're there they absolutely are incentivize to find those violations and report and send them to the branches of enforcement. 

      Our question here is how long does it take to train new examiners? When will we see the results of these new hires?

      It's my understanding at least that the training program at the SEC it has changed over time. Much of the training for examiners is done onsite during a real SEC examinations. In my experience, I can take up to a year to train a brand new employee, and of course it depends on how agreeing the employee. If it's someone right out of college let's say, there would be more training. If it's somebody who's been in the industry for many years and an industry expert, it would take less time. It would take up to a year to train a new examiner, although it doesn't mean that it takes a year for all new examiners.

      This next question goes to Colleen. Colleen, if you have your notes available with respect to the Trust and Investment advisers action, it says here, can you repeat the penalties assessed during that action?

      Sure. The firm and the Chief Executive Officer was fined $50,000, and the Chief Compliance Officer was fined $10,000. If you want to get more information on this case just search on Google via all SEC enforcement actions are publicly available, so you could read the whole case. Also, the points that I mentioned mainly on the recidivist violations were only a portion of what was in the actual action.

      Thanks Colleen. The next question we have here is, what if you've made changes to your compliance manual? How do you document different versions of policies to the SEC without inviting more questions?

      I think the SEC would expect your compliance policies to evolve over time as your business changes or as there are changes to regulations, your policies will evolve as well. When you make changes to your compliance manual, maybe it's obvious or not so obvious, but obviously you want to make this required. You want to maintain all versions of your compliance manual. It does make sense to keep a track changes version or do a compare through Word so that they can see the different versions.

      If there are different versions of your policies, I don't know, it depends on the changes but sure, you may have questions about why you changed the policy. Maybe you changed the policy because you wanted to enhance a particular area, or you may have changed the policy because you are no longer in a particular line of business and the policies were a little bit too robust for the compliance manual. Even if it does invite more questions, it is a required book and record that you maintain all versions of your compliance manual for 5 years. I don't know that there's a way that you can avoid the question, but I don't know that questions are of too much concerns.

      Colleen, I'll let you take this one if you'd like.

      If they don't ask for something you don't need to share it, but most likely they will because they're going to ask you if have had any violations of your compliance policies and procedures. What you find during a mock audit would fall into that category. If for some reason, although I would find it strange that they don't, if they don't ask you, you don't have to provide the information, but it's highly likely that they would ask. What's good is that you've corrected it so you want to show that you have an effective program like Vicky had mentioned earlier. Your program is capable of judging violations which you did through your mock audit, and then you also took reactive action, and I don't think this is something you should be afraid of sharing with the SEC.

      The SEC asked for any deficiencies and you'll have to say it's a deficiency, and then you'll have the benefit of saying "Oh, by the way, we've corrected it." No, you would still have to absolutely disclose that deficiency if the SEC asks for all deficiencies say in the past two years that you found.

      The next question is, are deficiency letters publicly available?

      From my very strong understanding that no, they are not publicly available. Is that yours as well Colleen?

      Yes, it is. Although I do believe if someone were to request under the Freedom of Information Act, they may be able to get the information, but I'm not 100% sure on that. They're definitely not something that's available online or readily available to the public.

      Is best execution still a hot topic?

      Yes, because there are risky area depending on the firm. I would say it is, it's not a hot topic but certainly it is a huge portion of reviewing an investment advisers compliance program. Maybe we just don't hear about it as much because there's so much guidance out there with respect to best price and execution. Hot topic no, but only because best execution ... How important it is, it's something that we've been living with for now, 15 years I think it's been on the SEC's radar. Definitely devote some time to make sure that you are reviewing whether or not you are getting the best price and execution or seeking the best price and execution under the circumstances of any particular trade.

      I'll give this one to Colleen, which personnel are considered key, and which would you recommend conducting mock interviews with?

      When it comes to your key personnel that the SEC will be reviewing during your pre-examination process, that's those folks listed on schedule A of your form adv, our executive officers and owners. When it comes to conducting a mock interview, I suggest you definitely want to interview your head portfolio managers and also your head trader. It's not uncommon for the SEC staff during an examination to ask a trader to walk them through a trade from the time the decision is made, to how they placed the trade, to when it reaches settlement. Vicky, is there anyone else that you think would be important?

      Any C-level employee, compliance personnel. No, you've covered it Col. Also, I will move on the the next question. If a fixable finding is corrected during the exam, does the SEC take into the consideration and not note the finding on the report?

      It is possible depending on the seriousness of the finding that they may not mention it on the report if it was fixed. I do see the SEC citing the deficiency in the report, but then also noting that the firm has indicated that it has taken corrective action. There is a record of it in the deficiency letter, I have found that they would also note that it was corrected during the onsite portion of the review, or prior to the deficiency letter being sent out to the registrant.

      Thank you everybody by the way for your involvement in asking these questions. How does the SEC assess whether if their finding is a deficiency or something to refer to enforcement. A deficiency would be, you can see from the cases and there are so many cases we could have discussed today, but from the cases that Colleen has mentioned, that first case. It was just a blatant, outright ... I don't know that there was even any harm to investors in that case, it was just repeatedly not doing what the SEC said, not have compliance policies and procedures. Is that correct, Colleen?

      Yes, that is correct.

      It could be that, or I would say most of, at least when I was at the SEC, it was when someone wasn't setting forth their fiduciary duty. Either money was stolen, it was a concerns that money was stolen, conflicts of interest were not fully disclosed, and that there was any kind of theft of money, or that portfolios weren't being managed in a way that was suitable for client aCCOunt. Those are the types of things that would go to enforcement. If it's a simple book and record violation, that's not going to enforcement. Anything that would be considered under 206 is false and misleading.

      Next question, when examiners leave the SEC, are they allowed to speak openly about their experiences, or does the SEC require examiners to sign a nondisclosure agreement when they leave?

      You left most recently than I did, Colleen. I do believe I signed something and could speak about ... I'll take this and I'll have Colleen answer in her experience. I am not permitted to speak about anything, to speak about any of the examinations that I was on with respect to discussing specific cases that I worked on. I'm not allowed to speak about any particular registrant and what their findings were, that is completely sensitive information. Although I can relay stories and exclude names, I can speak about my experience but not specifically about any registrant or specifically about the finding of a specific registrant. Colleen, is that the same for you when you're at SEC?

      Yes. It has been a while, it was like 10 years ago. Yes, I believe I did have to sign a nondisclosure agreement, I think it was also a part of our employment agreement when we were first brought on. Again, the same thing, we can talk about general experiences and real life stories about things you've seen over the years, but we would never inform anybody of who we examined and who a deficiency or a story is about. 

      Yes, that was my experience as well and in my understanding it's how it is today.

      Our next question is what do you think the SEC is most interested in exams today?

      Colleen, I'll give this one to you and then I'll add anything if I can think anything to add. From our clients, what does it seem they're most interested in?

      What we have seen is a lot of newer registered exams, what the SEC has been calling their presence exams where they're just trying to get out there and know the firm. People have told me that they found that mostly the examiners are friendly, and there's a lot of interest in the compliance program in making sure that they have adequate compliance policies and procedures especially with respect to these newer registered advisers.

      I would add to that obviously, if you're getting publications and alerts, cybersecurity of course are in hot topic. Also, I think the SEC is always, always interested to saying 'harm to investors', making sure they're complying with the custody rule, making sure you're not misleading investors or clients. That's just a common thread that's been through examinations from what we've noted.

      Someone says here that they were able to find a document request letter from 2014 online, is this recent enough to use to conduct a mock audit?

      I think it would be. The SEC has a score, like 60 or 70 item document request list, and it doesn't change as very much from time to time. A lot of these questions I have been on there, I can tell you for sure, a good portion of those questions have been on there for the past 16 years plus. Absolutely, a request letter from 2014 can be used as long as it was a full document request letter.

      We only have a couple of more questions to get to, but how long does the onsite examination lasts?

      Colleen, do you want to pick that?

      This will be out last question I believe. Generally I find about a week. They used to be longer when we did the surprise examinations like Vicky had mentioned. Now that you're given time before to gather documents and prepare, I think a week is generally the most common in my experience.

      A week, maybe two, it really depends on the size of your firm. Has the SEC have been to your firm before or is it your first big examination? Yes, I think that's about right, about one week, maybe two. Colleen do you agree, it's not as typical for an onsite exam to last two week?

      I don't think it's as common place as it used to be in the past. If you are a larger firm or if you have multiple registrants that you are associated with and being examined at the same time which is a common place, that can also cause it to last longer.

      Thank you everybody for attending. At this point I'll just put it to Steven with some final remarks.

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