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SEC Calls

What do you do when the SEC calls to notify you that you’re being audited? 

Regulations and ComplianceFirst breath and don’t panic. Everyone gets audited eventually and it’s not always a bad thing. But taking certain steps in addition to just collecting and uploading documents to the SEC Portal can make the difference between an easy audit and a nightmare.

  • Call your outside counsel and/or outside compliance consultant. You may want to get their help in collating the documents. We strongly recommend that every document be Bates stamped (numbered in a manner to identify it should it be later considered a “discovery document” in the event of litigation). Ideally, the coordination of documents should be done with counsel or consultant help – but at a minimum, should be done with some guidance at the outset.
  • Alert all senior level personnel and make sure they understand the importance of their availability during the exam process. During the course of the exam, provide verbal updates to keep them informed of progress and status of exam.
  • Review documents BEFORE you upload them. Collect the documents that the SEC requests but don’t just send them. Someone (either the firm’s chief compliance officer, its compliance consultant or its outside counsel) should read every single piece of paper being submitted before you sent them to the SEC. You need to know if there are issues that can be identified from the submitted documents that will be raised by the SEC. Doing this allows you to prepare cogent answers and minimize the impact of potential problems. It is a major mistake to just upload, wait and then react. Likewise, do not change or alter documents to “make them look better” or to be more responsive.https://www.sec.gov/litigation.pdf
  • Review your online presence before the SEC arrives. Google search and review every mention of your firm and its key people – particularly the firm’s portfolio managers. And don’t limit your search to the first few mentions on page 1 of the Google results and ignore mentions on back pages. As social media has become a bigger presence in the financial services world, the SEC has increasingly started reviewing everything that’s out there prior to showing up for the interview – and they will frequently ask questions related to statements made by people working for the firm. Reviewing this in advance will help refresh your memory about that interview given awhile back – as well as the comments that the public may have raised (and which the examiners may too). Look for inadvertent testimonials. http://www.sec.gov/investment/im-guidance-2014-04.pdf
  • Make sure the CCO knows all the answers and explanations. Recent exam feedback has suggested that the SEC expected the firm’s chief compliance officer to know certain answers and not defer the explanations to others – like having the CIO explain what the cyber protections were. At a minimum, the chief compliance officer should have a firm enough handle of the details of everything so that if necessary he/she could explain. We think the SEC wants to know that there is compliance involvement and they perceive this demonstrates that.
  • No one should be interviewed by the SEC without being prepared in advance. It is an art form to learn how to not over answer a question. And when to simply say I don’t know. And when to say I need a break and to consult with counsel. Outside compliance consultants and law firms can help prepare interviewees. Note – they also need to be taught to NOT say they were coached – since this “freaks” the SEC out and preparation is not tantamount to coaching! The likely candidates for SEC interviews are senior management (which will vary from firm to firm, including CFO, CCO, General Counsel, Head Trader, Heard of operations, marketing personnel.
    The CCO should make sure that these individuals are fluent in the firm’s policies and especially those that apply to their functions. Traders should be aware of best execution while marketing team members should be fluent in gifts and entertainment, marketing materials and pay to play policies. Some team members may try to duck an SEC interview. We do not recommend this as it will be interpreted as “having something to hide.” Senior management should be available to the SEC staff and be friendly and cooperative but always accompanied by the CCO. If you are able to select personnel for interviews, select the personnel who will be the best representatives for the firm.
  • Identify your “squeaky wheels”. Did you have any customer complaints or disgruntled employees? Don’t assume that the SEC is unaware of this. Refresh yourself on the facts involved and be prepared to answer related questions.
  • Review your last 3 years of testing and annual reviews particularly if conducted by an outside firm. If there were recommendations made, either make sure that you implemented them, or have a good explanation as to why they weren’t.
  • Review any prior SEC or regulatory correspondence. If the prior SEC correspondence is a deficiency letter, make sure that any issues have been resolved and that any action you represented to the SEC that you would take, has been taken.https://www.sec.gov/litigation/admin/2013/ia-3702.pdf
  • Button down the hatches on shared office space. If you share your office space with other firms – regardless of whether they are also in financial services or investment advisers, make sure that
    • your office doors are lockable;
    • any area where there is customer information is lockable;
    • computers automatically are locked when the user gets up;
    • there is no shared information in common space like conference rooms, kitchens and fax rooms; and
    • generally, that the SEC will leave comfortable that your firm’s space is separate and secure without the possibility of confidential information being passed to people outside the firm.

    Also – you are going to need to park the SEC in a conference room for the duration of your visit so you need to check with your office mates to make sure that they know this and the room is available. Finally, for those firms with shared office space expect this to be a topic covered in the personnel interviews mentioned above.

  • Is your ADV up to date? Check your ADV before the SEC arrives and make sure that the basic information is correct – like the address of the firm, the name of the CCO, the administrator and other Part 1A information. If it’s not, update it before the SEC arrives and tell them that it was an oversight that was caught in the preparation for the audit that has been immediately corrected. And given them some assurance that you now have a process in place (and then PUT ONE IN PLACE) to avoid these oversights in the future. https:/www.sec.gov/litigation/admin/2016/ia-4455-s.pdf Advantage Investment Management, LLC , Administrative Proceeding File Nos. 3-17348; 3-17349 ; https:/www.sec.gov/litigation/admin/is1614.txt; Oakwood Counselors, Administrative Proceeding File No. 3-9243
    https://www.sec.gov/litigation/admin/2016/ia-4456.pdf Washington Wealth Management, LLC, Administrative Proceeding File No. 3-17349

Of course the best way to prepare for an SEC audit is to conduct a mock audit on a regular basis. This gives the firm an outside set of eyes to look at the firm’s practices and procedures with the same level of scrutiny as the SEC will have. We strongly urge you to consider calling us and to talk about a mock audit.

Jane Shahmanesh
jane@adherencellc.com
917-885-2596
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Saleemah Ahamed
saleemah@adherencellc.com
917-476-8632
LinkedIn Profile
Peter Galloway
pete@adherencellc.com
917-399-9179
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Adherence Compliance Group +1-917-885-2596
220 W. 93rd Street, #8C New York NY 10025