WASHINGTON — As the SEC
That means taking a hard look at conflicts of interest and disclosures, ensuring the compliance manual is up to date and gaming out how the firm will respond to various inquiries the SEC could raise, a panel of industry officials warned at the Investment Adviser Association's annual compliance conference.
"If the first time you're thinking about it is on receipt of the letter, you're going to have a problem," said Steven Yadegari, a former SEC official who now works as chief operating officer and general counsel at the New York RIA Cramer Rosenthal McGlynn.
When the initial exam letter arrives requesting documents, a firm's compliance leaders will want to huddle with staffers from various business lines to orchestrate their response. That meeting can also help the compliance team get a sense of the scope of the document request, which often is overly broad, said Mary Keefe, director of regulatory affairs at Nuveen Asset Management, an advisory firm headquartered in Chicago.
An advisor's initial instinct when notified of a pending examination may be to worry or be nervous. We recommend that you take fear out of this process, though. Once you receive notification of a regulatory examination, stay calm and follow these seven steps.
"You also want to talk through the exam letter with your group of subject-matter experts because some of the requests are going to be too broad, or too burdensome, or not apply to your firm, or be very ambiguous," Keefe said. "So once you get that whole list of things together, call the SEC back and talk through all these issues with them. And they're usually very willing to listen to you."
Keefe stresses the importance of frequent communication with the SEC's exam team and suggests that firms consider the SEC's initial document request as the opening gambit in what should be an ongoing negotiation process.
"If it's a very broad request, I will often offer to give a smaller sample than what they're asking for," said Keefe, who directed the SEC's Chicago Regional Office for a decade before joining Nuveen. "If they're asking for four years, I'll say why don't you start with a quarter and you tell us then after you've looked at it whether it's meeting your expectations, and maybe we can talk about reducing the amount of documentation that you've requested."
Staging a mock exam can be a helpful exercise for firms to work through how they will respond to the questions that are likely to come up in an exam, said Wendy Fox, chief compliance officer at Ariel Investments, a Chicago RIA, and another tenured SEC alumna. In particular, firms should expect to field questions from SEC examiners about new business activities and should make sure that the personnel working in those fields are sufficiently prepped.
"If you have a new line of business, they're going to be focusing on that new line of business, and the people in that new line of business need to be ready for the questions that they come to the table with," Fox said.
Just as it can be helpful to communicate with SEC examiners before they arrive at the firm to explain the business model and possibly narrow the scope of documents required, compliance officers should do their best to address potential deficiencies early on, according to David Bergers, a partner at the law firm Jones Day and a former deputy director of the SEC's Division of Enforcement.
Advisor exams commonly result in deficiency letters, in which examiners enumerate the various compliance shortfalls they discovered during their visit. Advisors often dispute those findings, but in order to avoid generating a permanent record, it's important for the firm to make its case before the examiners issue their letter.
"Your opportunity is before the letter goes out," Bergers said. "Once the letter goes out, it's there. Yes, you can respond, but the letter is not going to be withdrawn."
