Preparing for an On-Site SEC Audit

Tips and Tools for Surviving the Regulatory Examination Process of Your Investment Advisor

According to the U.S. Securities and Exchange Commission’s (SEC) examination staff, federally registered investment advisors may be subject to an SEC examination or inspection for three main reasons: (1) routine examination or inspection, (2) because of an investor complaint, and (3) a sweep, or industry-wide, examination focusing on a particular area of investment advisor compliance or risk area.

An on-site visit from the SEC can be a stressful time for your managing principal, chief compliance officer, the registered investment advisor firm itself and the firm’s staff. The ability to effectively plan and prepare for an SEC inspection can reduce this potentially stressful situation and enable your registered investment advisor firm to have more confidence leading into a SEC examination. On-site investment advisor examinations by the SEC are conducted on both an announced or unannounced basis. Prior to an announced examination, the SEC will deliver to the registered investment advisor a pre-audit packet containing information on the SEC’s authority to conduct the examination under the Investment Advisers Act of 1940 and information or documents SEC examiners will review as part of the inspection.

The following is a list of tips and tools prepared to help you as Chief Compliance Officer (“CCO”) survive an SEC examination or inspection of your registered investment advisor firm.

  1. Acknowledge Announcement. Immediately respond to the SEC’s announcement of an examination of your registered investment advisor. Once you are contacted by the SEC, it is important to communicate with the lead SEC examiner. This time should be used to ensure both your registered investment advisor firm and the SEC are okay with the time and date of the visit. In many cases, the SEC will be willing to reschedule the time and/or dates if it does not fit your schedule, so don’t be afraid to ask.
  2. Answer Requests Promptly. Reply to all requests from the SEC in a timely manner. During the pre-audit period, your registered investment advisor firm will be asked to provide the examiners with several documents, which may include the registered investment advisor firm’s Form ADV Part 2, disclosure brochures, investment advisory client agreements used by the firm, current investment advisory client list, investment advisory clients participating in wrap fee programs, organizational chart, financial statements for the investment advisor firm, and the registered investment advisor’s written compliance programs including its code of ethics and supervisory procedures. It is important to provide these documents by the deadline identified by the SEC.
  3. Prepare Background Presentation. Consider preparing a short (20 – 30 minute) presentation, along with PowerPoint slides, providing an overview of the investment advisor firm. The presentation should be given at the beginning of the SEC’s examination process as part of, or even before, the SEC’s initial interview process. The presentation allows your investment advisor firm to take control of the investment advisor examination and sets a tone of seriousness and professionalism. Topics could include the registered investment advisor firm’s organization, culture of compliance, lines of business, types of investment advisor clients and investment advisory services provided.
  4. Make Staff Key Available. Have essential personnel available for interviews with SEC examiners. This could include executives, managers, investment advisor representatives and compliance staff of the investment advisor.
  5. Designate CCO as Primary Communication Channel. The Chief Compliance Officer (CCO) should be involved in all meetings and discussions with SEC examiners. The CCO should be the main contact and coordinator of the examination of the registered investment advisor.
  6. Act Honestly. Cooperate with SEC examiners and be honest.
  7. Educate Employees. Prepare and educate all employees of the registered investment advisor for the SEC examination. Provide them with instructions for when and how to communicate with SEC examiners.
  8. Keep IA Records Separate from Other Business. Keep investment advisory books and records separate from files for other lines of business. Remember, the SEC is there to review your investment advisory business. Provide what’s requested by SEC examiners. Do not provide more than asked or needed by the SEC.
  9. Track All Documents Provided to SEC. Prepare a method for tracking all documents requested by and provided to SEC examiners. The best method is to prepare an Excel spreadsheet outlining all documents requested by SEC examiners, sorted by the corresponding item number on the document request list. Prepare a separate file folder for each document actually provided to SEC examiners and keep the files in a box sorted by the corresponding item number on the document request list.
  10. Retain Copy of All Documants. Make a copy of every document provided to SEC examiners and notate the date, time, and SEC examiner that received such documents.
  11. Provide Adequate Work Space. Have a nice, clean space prepared for the SEC examiners to work.
  12. Request Exit Interview. Most SEC examiners will conduct an exit interview to discuss their initial findings of their inspection of your registered investment advisor. If not offered, request such a meeting with the SEC examiners. Items discussed during the exit interview with the SEC are often unofficial; however, your registered investment advisor firm will be able to begin working on any expected deficiencies before the final investment advisor examination letter is received.
  13. Prepare for a Deficiency Letter. Expect a deficiency letter from the SEC. Over 95 percent of SEC examinations identify at least one deficiency.
  14. Answer Deficiency Letter. Respond to the SEC examiner’s post-audit letter by the given deadline. If you cannot meet the deadline, inform the SEC examiners immediately. The SEC examiners are usually willing to work with you and may provide additional time.
  15. File for FOIA Treatment. Consider filing a request to the SEC so that information provided to SEC examiners will not be disclosed to third-parties under the Freedom of Information Act. You may contact the SEC examiners to discuss the procedures for filing such a request.

Still worried about preparing for a SEC examination? RIA Compliance Consultants can serve a resource in preparation for a SEC’s examination of your registered investment advisor firm. Please contact RIA Compliance Consultants at 1-877-345-4034 or email us here. Let us serve as your compliance expert while you continue to build your business.

Disclosure

The information contained in this Frequently Asked Questions webpage is general in nature and intended for educational purposes only and is not intended to be a comprehensive analysis of the securities regulations applicable to registered investment advisers. It is not intended to constitute compliance consulting advice or apply to any particular investment adviser firm’s specific situation. For more information, please see our Disclosures.