All SEC-registered investment advisers are subject to SEC examination authority and may be examined by the SEC. Are you excited about the prospect of an exam? Do you feel confident in and proud of your compliance program and its controls? Are you proud of your compliance culture? Or do you dread the simple thought of an SEC exam? Have you done enough? Are your controls tight, streamlined, and effective? As an RIA, an SEC examination may occur at any time, making ongoing preparedness essential.
So, what does exam preparedness look like? Although every firm is unique, exam preparedness typically begins with several core compliance foundations: a written compliance program (policies and procedures), effective management of conflicts of interest and fiduciary obligations, and comprehensive books and records (recordkeeping).
Regardless of the size of your firm, the initial SEC examination request letter typically includes numerous items for review. The examination may be broad in scope or limited to one or two specific areas, such as the Marketing Rule, cybersecurity, recordkeeping, or custody. In most cases, the SEC will establish an examination period by specifying a start and end date, defining the time during which advisory activities occurred and records were created that will be subject to review. Regardless of its scope, the request letter marks the beginning of the examination process. The following is a sample of some items commonly requested as part of a broad scope exam:
More recently, document requests have included information regarding an adviser’s adopted Reg S-P and cybersecurity programs.
Does a list like this make you feel confident or panicked? While the volume of requested information may seem overwhelming, most of these materials should already exist within a well-designed compliance program. The goal is not to scramble when an examination request arrives, but to maintain a level of preparedness that allows you to respond confidently and provide documentation demonstrating the effectiveness of your compliance program.
Upon receipt of an examination request letter, it would be prudent to gather stakeholders across your firm: compliance, operations, portfolio management/investment, tech/IT, finance/accounting, client service/relationship management, marketing, and senior management. While compliance personnel typically possess broad knowledge of the firm, they do not know every operational detail. As a result, you should rely on subject matter experts throughout the organization to assist with documentation, materials, and responses.
Once the SEC receives your initial requested items, exam staff will likely follow up with further requests, clarifications, or requests for interviews. Following your policies and procedures, having effective operational workflows, and comprehensive recordkeeping will help paint a clear picture to the SEC of your firm and its compliance program.
The scope and complexity of the examination will largely determine its duration. Examinations may last from several weeks to many months, and occasionally longer when significant follow-up is required. The examination will generally conclude with one of the following outcomes:
Ultimately, following your policies and procedures (and reviewing them regularly for accuracy and changes), conducting regular reviews and testing, and maintaining clear and readily available documentation helps position your firm for a successful SEC examination. Furthermore, communicating with leadership, department heads, and staff regarding changes to firm policies and regulatory developments (at a minimum, through annual staff training) will help identify lapses in procedures, lack of understanding in firm policy and procedure, and general adherence (or lack thereof) of the firm’s compliance culture and requirements. Remember, exam readiness is an ongoing process, not an event.
As a compliance leader, you have access to a wide range of resources, including industry publications, compliance conferences, and professional networking opportunities. You may also elect to engage a compliance consultant to provide an objective assessment of your firm's compliance program, keep you informed of regulatory developments that may impact your business, offer guidance on emerging compliance issues and industry best practices and assist with regulatory examinations and other compliance-related matters.
Whether you are preparing for your first SEC examination or enhancing an established compliance program, an independent review can provide valuable insight and peace of mind.