How Can RIAs Best Prepare for an SEC Exam?

SEC exams can be nerve-wracking for RIAs, particularly given the more aggressive tone the SEC has adopted in recent years. Nonetheless, they are an inevitability for those investment advisers registered with the SEC, and so it behooves RIAs to ensure they are prepared for such exams given the severe consequences that can arise for not being prepared. As the old saying goes, “Those who fail to prepare must be prepared to fail.” In this article, we will detail five best practices RIAs can implement to better prepare their firms for such SEC exams. If you want to better understand the SEC exam process, please click here.

Review the Annual SEC Exam Priorities and Other Guidance from the SEC

First, RIAs should ensure that they are familiar with recent guidance from the SEC regarding its priority focus areas for exams. In recent years, the SEC has published a significant amount of formal and informal guidance on what topics they are most focused on when examining RIAs. Such guidance takes many forms including the annual publication of the SEC examination priorities for the upcoming year, periodic risk alerts highlighting specific issues raising concerns as identified by the staff in recent examinations of investment advisers, and staff bulletins on specific compliance topics. Recent high priority risk areas include ensuring compliance with an adviser’s fiduciary duties of care and loyalty to its clients, management of conflicts of interest, compliance with the SEC’s new Marketing Rule, proper handling of trade errors and allocation of investment opportunities; proper business continuity planning, cybersecurity preparedness, compliance with custody rule requirements, adherence to the adviser’s code of ethics; ensuring risk assessments and annual compliance reviews are properly conducted and documented, maintenance of required books and records, and ensuring that employees are not engaged in off-channel communications. Although SEC exams are not uniform and can vary widely among branch offices and even individual exam teams as to the topics to be covered in individual RIA exams, the above publications highlight the topics most likely to garner the most scrutiny in exams. Therefore, it behooves RIAs to become very familiar with such regulatory updates and to ensure that their firms are properly addressing the issues and deficiencies highlighted by the staff in such publications.

Familiarize Yourself With SEC Document/Information Requests

Second, RIAs should become familiar with the types of information and documents that are being requested in recent SEC exams and ensure that the adviser has all such information and documents and that they are readily accessible. By way of background, the SEC reviews an RIA by initially requesting significant volumes of information about the firm’s business and compliance program.

Just recently, the SEC published a risk alert in which it included a document highlighting some of the typical information and documents the staff requests from investment advisers at the outset of an examination. Hopefully the SEC will continue to update this list as it evolves. Nonetheless, even if the SEC does not update this list, advisers can reach out to us or another firm that regularly guides advisers through the SEC exam process to understand what information and documents the SEC has been requesting in recent exams.

By understanding what documents the SEC staff is requesting, RIAs can review their compliance books and records and ensure that they have all such books and records. RIAs may want to create a special folder where such information and documents can be housed for easier retrieval in the event the SEC comes knocking.

Prepare Staff for Interactions with the SEC Staff

Third, RIAs should prepare their staff for how to interact with SEC staff members in anticipation of an examination. When SEC staff members conduct examinations of advisers, they will typically want to interview members of senior management in order to learn about the adviser’s business and to gauge such employees’ understanding of the firm’s compliance program. RIAs should ensure that their key personnel understand core elements of the firm’s compliance program and can speak with SEC staff members on compliance topics. If there are gaps in knowledge, RIAs should ensure that key persons receive additional compliance training to bolster their knowledge in anticipation of an SEC exam.

In addition to providing substantive compliance training, RIAs should also provide practical guidance on proper ways to respond to SEC exam staff members during examinations. Advisers may want to consult us or another firm that regularly assists advisers through exams on how firm staff should interact with SEC staff members to facilitate a smooth examination.

Consider Preparing a Presentation to Educate the SEC Staff About the Firm

Fourth, RIAs may want to prepare a presentation about their business to the SEC to help the staff better understand the adviser’s business. This presentation can be given during the staff’s first interaction with the adviser following the firm’s response to the staff’s initial information request. Presentations about the adviser’s business can be helpful to the staff particularly since the staff has very limited knowledge about an advisory firm prior to the exam, which is mostly garnered from a review of the adviser’s Form ADV filings and its website or other public marketing materials.

The presentation can help the staff identify the issues most pertinent to the adviser’s compliance program which can hopefully avoid unnecessary and irrelevant questions from the exam staff and the need for the adviser to invest time and resources to respond to irrelevant requests. Such presentations can potentially shorten the exam as well, which can be to the benefit of both the SEC staff and the adviser.

Consider Having an External Mock Audit of the Firm’s Compliance Program

Fifth, RIAs can engage a third party to conduct a mock exam of the adviser’s compliance program, which is essentially a simulation of an actual SEC exam. There are many benefits of having such a mock exam conducted including helping advisers become familiar with the process and helping the advisers to identify and remedy any gaps in their compliance program. For a more fulsome discussion of the benefits of an SEC mock exam, please click here.

In summary, adopting the above best practices does not guarantee that an adviser will go through an exam unscathed, but adopting such practices will almost inevitably benefit the RIA.

What questions do you have about preparing for an SEC exam? Please reach out, and we’ll be happy to help answer those questions.