You have gotten the call, and the SEC is coming. What now? Are you ready? How do you prepare?
If you haven’t previously been though an exam, it can be very intimidating, but that is also the case for exam veterans who have been through several. The issues keep changing, as do the examiners, and you can’t rely on your last exam—if the SEC did not raise an issue during a previous exam, it is not prevented from doing so the next time. Also, the quality of the examiners continues to get better and the exam process much more rigorous.
Remember, you are a fiduciary—you are charged with knowing how your firm is complying with regulations, and if you do not know the answer, you are charged with ascertaining same. You can’t blame your consultant. The SEC is not coming to your office to educate you. To the contrary, it is coming to test your compliance processes. Prior to the new, more rigorous SEC regime under current Chairwoman Mary Jo White (who is proving to be very capable), the SEC was more apt to forgive compliance mistakes; not the case any longer. Remember, when you sign your Form ADV Part 1, you aver that the answers are correct, not that you have given it your best shot.
The exam is a performance. Are you performance ready? Can you assemble all the requested information and documentation in a timely manner? Is your chief compliance officer ready? Remember, it will be his or her job (not the CEO’s) to demonstrate to the commission the firm’s compliance readiness. The commission will be able to discern pretty quickly whether or not the CCO is up to the task: Is he or she capable and, if so, is there support from the top? Does the CCO have the requisite authority and resources for the job? Is he or she being treated as a member of senior management?
If the firm (the CCO) has done a good job with its risk assessment, it will serve as an exam proffer for what the firm does and, more importantly, does not do, thereby culling from the exam process many of the issues that the commission seeks to review. This is something that should be provided to the commission prior to coming on site so that it has a snapshot of the firm’s operations.