We know first-hand the stress involved when the SEC calls to inform you that they are coming onsite to conduct an exam. Not only have many on our team been examiners, but we have also received the call as in house CCOs. Obviously, the most important thing is to be certain that there is no fraudulent activity occurring at your firm. Second to that, preparedness for an SEC exam makes all the difference in the direction an exam could take; especially with the risk based approach the SEC is taking to exams.
Of course, we always push and advocate for firms to take a proactive approach to compliance. However, for those firms who put compliance on the back burner until they receive an exam notification, we still think that taking a thoughtful approach in how you manage an exam can make all the difference.
Even if you haven’t been doing the level of independent testing that you should be doing, your thoughtful responses to SEC exam requests and interviews could very well affect the direction the exam takes. For example, if you respond to SEC inquiries in a stream-of-conscious type manner, you can potentially say something that might alert them and create a red flag. Time after time we see this unintentional mishap. There are several enforcement cases today that came to be as a result of this type of approach to an exam.
Coaching a firm and its employees on exactly what to say during an SEC examination is frowned upon, and not what we are suggesting. Rather, thinking about what the SEC is asking and preparing for the exam by reviewing your documents and firm history quite often goes hand in hand with presenting your business in an organized, controlled fashion.
We often receive calls from firms right before an exam. We think this is a smart move and late is better than never. Of course, the SEC knows that you just called a consultant, but addressing firm risks and finding deficiencies before the SEC does can impact the direction of an exam, and additionally, gives you time to flesh through issues before the SEC asks their questions.
The SEC takes a risk-based approach to almost all exams. Given this, firms have a bit more control in whether or not an exam can be closed quicker.
We are seeing that registrants have more control now than in the past with respect to controlling an exam. We provide these simple SEC tips for firms to consider when dealing with an SEC exam in today’s regulatory environment.
We plan to expand on this topic in an upcoming whitepaper that will discuss dealing with exams in the risk-based, regulatory exam environment. We will share the whitepaper when available.
In the meantime, please reach out to us if you have questions on how to frame an exam and get the examiners in and out of your business as swiftly as possible.