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SEC Exam Coming? Use These 5 Tips to Prepare

By Richard Chen

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Securities and Exchange Commission exams can be nerve-racking for RIAs, particularly given the more aggressive tone the SEC has adopted in recent years.

Nonetheless, they are an inevitability for those investment advisors registered with the SEC. It behooves RIAs to ensure they are prepared for such exams given the severe consequences that can arise for not being prepared. 

As the saying goes, “Those who fail to prepare must be prepared to fail.” Adopting the following five best preparation practices does not guarantee that an advisor will go through an exam unscathed, but they will almost inevitably benefit the RIA.

1. Review Annual Exam Priorities and Other SEC Guidance

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 advisors, and staff bulletins on specific compliance topics. 

Although SEC exams are not uniform and can vary among branch offices and even individual exam teams, the above publications highlight the topics likely to garner the most scrutiny in exams. Therefore, RIAs should become familiar with such regulatory updates to ensure that their firms are properly addressing the highlighted  issues and deficiencies.

2. Become Familiar With SEC Document and Information Requests

RIAs should become familiar with the types of information and documents that are being requested in recent SEC exams and ensure that advisors have 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. 

The SEC recently published a risk alert that included a document highlighting some of the typical information and documents the staff requests from investment advisers at the outset of an examination. Ideally, the SEC will continue to update this list as it evolves. Even if the SEC does not update it, advisors can reach out to firms that regularly guide advisors 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 folder in which such information and documents can be housed for easier retrieval in the event the SEC comes knocking.

3. Prepare Staff for Interactions With the SEC

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 advisors, they will typically want to interview members of senior management in order to learn about the advisors’ business and to gauge employees’ understanding of the firm’s compliance program. RIAs should ensure that their key personnel understand core elements 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, RIAs should provide practical guidance on proper ways to respond to SEC exam staff members during examinations. Advisors may want to consult firms that regularly assist advisors through exams on how firm staff should interact with SEC staff members to facilitate a smooth examination. 

4. Consider a Presentation to Educate SEC Staff

RIAs may want to prepare a presentation about their business to the SEC to help the staff better understand the business. This presentation can be given during the staff’s first interaction with an advisor following the firm’s response to the staff’s initial information request. 

Presentations about the advisor’s business can be helpful to the staff particularly since the staff has very limited knowledge about an advisory firm before the exam. That background is primarily garnered from a review of the advisor’s Form ADV filings and its website or other public marketing materials. 

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

5. Consider an External Mock Audit of the Compliance Program

RIAs can engage a third party to conduct a mock exam of the advisor’s compliance program, which is essentially a simulation of an actual SEC exam. 

There are many benefits of conducting such an exam, including helping advisors become familiar with the process and helping them to identify and remedy any gaps in their compliance program.  

Richard Chen is a managing partner of Brightstar Law Group, a compliance and securities law firm serving investment advisors. 

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