What to Know About the 5 Stages of an SEC Audit

By Ed McCarthy

Slideshow August 05, 2022 at 12:50 PM Share & Print

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The share of RIAs getting audited is on the rise.

According to a January 2022 U.S. Securities and Exchange Commission report from the Office of Inspector General’s Office of Audits, 10% of RIAs were audited in fiscal year 2015.

However, the report notes that “the percentage of RIAs examined improved to 15 percent in FY 2020 and 16 percent in FY 2021.”

Jason Vinsonhaler, director of compliance at RIA in a Box, notes that undergoing a regulatory audit can be extremely stressful for an RIA firm, especially for the firm’s CEO and chief compliance officer.

Vinsonhaler offered suggestions to help RIA firms prepare and navigate an audit with relative ease, from getting documents organized to dealing with any deficiencies the audit finds.

Check out his advice in the gallery above.

Ed McCarthy is a freelance financial writer who holds the certified financial planner and retirement income certified professional designations.

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1. Prepare Your Documents

Everything from your organization chart to client information, employee trade records, and advertising materials should be gathered. Prepare your firm overview presentation, which gives you an opportunity to explain what you do and how you do it, well in advance.

“The best place to find the areas where the SEC will focus is in the examination priorities report the commission posts annually,” Vinsonhaler suggests. “For 2022, the areas of focus are private funds, ESG investing, information security, cryptocurrency, and standards of conduct.”

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2. Initial Interview

The firm’s senior management, CCO and compliance staff should be available and prepared to answer detailed questions. A game plan should be established during the interview, and you should ask any questions you may have about the process during that time.

“The firm should ask when and how long the examination will be to set scheduling expectations,” says Vinsonhaler. “They should also have a plan for where the examiner can work if they plan to be on site.”

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3. On-Site/Remote Interaction

This can last anywhere from one to five days. RIAs should alert their staff and keep records of what they provide to examiners. They should also be prepared to give a tour of their office and expect their staff to be interviewed (the CCO can sit in on those meetings).

According to Vinsonhaler, the initial examination conducted by the SEC is a limited scope exam within the first six to 18 months of registration and is almost always conducted remotely as are many focused sweep examinations. “Before the pandemic, full-scope examinations were conducted on-site,” he notes. “As with many things in life, the pandemic changed the approach, but we are seeing a shift back to on-site examinations.”

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4. Exit Interview

This is an opportunity to identify and discuss preliminary deficiencies. If an exit interview is not offered, the RIA firm should ask for one so they can get a better understanding of the timeline and next steps.

According to Vinsonhaler, many deficiency letters will have information on how the examiner expects the deficiency to be corrected, which can help the firm work more efficiently toward the correct resolution.

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5. Deficiency Letter

The SEC has up to six months to send the firm this letter, and the RIA is required to respond within 30 days. The letter should detail what deficiencies have to be resolved, as well as how much time you have to do so.

The most common deficiencies are rooted in a firm’s policies and procedures, Vinsonhaler explains: “These deficiencies can usually be resolved with an update to the firm’s written procedures as that is the standard to which the firm’s compliance program is held under the ’40 Act.”

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