Throughout the course of the calendar year, the SEC uses several forms of communication to keep...
In today’s regulatory environment, firms can’t afford to “wait and see” when it comes to compliance. While its resources have been reduced, the Securities and Exchange Commission (SEC) has gotten smarter about its exams approach and does not expect its pace of investment adviser examinations to decline. That’s why it’s critical for investment advisers to prepare now for their next SEC exam. The best way to ensure full preparedness is through a mock SEC exam - a proactive way to test your firm’s compliance health before you get the call and start to scramble.
What Is a Mock SEC Exam?
A mock exam is a simulated SEC examination designed to proactively assess an adviser’s compliance program, identify weaknesses, and prepare for a potential regulatory review.. It mirrors a real exam with document requests, interviews, and data sampling, but without the regulatory consequences.
Think of it as a fire drill for your compliance program.
Why Use a Third Party?
While some firms attempt to run mock exams in-house, most of the time, they lack expertise and are prone to unconsciously overlook problems or justify poor practices. Outsourcing to an experienced provider offers the following key advantages:
- Independent Oversight
Internal teams are often too close to the day-to-day. A third party brings objectivity and an unbiased evaluation of your firm’s compliance program. - Exam Expertise
Seasoned compliance consultants, who have guided numerous clients through a variety of exam scopes, know exactly how the real exam plays out, and what red flags the regulators are watching for. - Team Readiness
Staff interviews can be the most nerve-wracking part of a real exam. A mock process trains your team, guides your staff on what not to say, and builds confidence. - Risk & Cost Mitigation
Many insurance policies offer reimbursement or premium credits for proactive testing like mock exams. Even without that, the cost of a mock exam pales in comparison to regulatory enforcement, legal fees, or reputational damage.
The Hidden Costs of Doing Nothing
Too often, firms put off mock exams because they haven’t been examined recently, or assume that their business model is fairly standard and their existing policies are adequate. That’s a dangerous bet. Even “plain vanilla” advisers get complacent. Gaps in documentation, outdated policies, or inconsistent implementation can all trigger deficiencies during an actual exam.
By contrast, firms that conduct periodic mock exams have more thorough documentation, up-to-date policies, and are better prepared when they receive the call from SEC.
What a Mock Exam Covers
A mock exam should be tailored to the investment adviser’s particular practice. Depending on the adviser’s business model, a SEC mock exam may cover topics that include, but are not limited to:
- Code of ethics reviews and personal trading
- Supervisory practices and conflicts of interest
- Regulatory filings
- Marketing and Advertising Rule compliance
- Portfolio management oversight
- Trading practices and best execution
- Valuation practices and fee validation
- Cybersecurity protocols
- Books and records accuracy
Bottom Line
Mock SEC exams aren’t just best practice, they’re smart business. They offer peace of mind, staff preparedness, and a strategic edge in regulatory readiness. And when done with the right partner, they can reduce your regulatory exposure, your costs, and your stress.
