Is your firm adequately prepared for a regulatory exam? The scope of the regulatory examination process continues to become increasingly complex. However, if your firm is adequately prepared to answer all of the issues that will be raised by the SEC during the examination process, the exam should not at all be a painful or worrisome experience.
Some of the items requested that have caused the most confusion for investment advisory firms include questions regarding the “risk management process.” Most investment advisors tend to think about risk in terms of investments and portfolio management. However, the SEC also requires that advisors assess risk relative to operational and compliance risks. We advise investment advisory firms to perform an annual risk assessment as part of its annual CCO review, each of which should be provided to the SEC during a regulatory examination. We address these risk assessment matters (and prepare a risk assessment and CCO review) as part of performing mock audits.
For SEC-registered investment advisors, the frequency and scope of compliance inspections is, for the most part, determined by the Commission’s perception of an advisor’s compliance risk profile. Examiners will focus reviews on issues that represent the greatest potential threat to investors, and the corresponding frequency of examinations will be based upon the scope of an advisor’s operations and the results of previous exams. In order to be prepared, the firm should be familiar with both the examination process and the issues that will be raised during the examination. By conducting a mock examination, advisors are better able to address and correct current deficiencies, enhance current procedures and, most importantly, recognize and avoid those issues that could result in potentially adverse regulatory determinations or enforcement matters.
Please note: Mock audits conducted by non-law firms are subject to disclosure and/or turnover