Do a 'Mock Audit' Now Before SEC Comes Knocking: Compliance Pro

With the recent news that the Securities and Exchange Commission plans to resume onsite exams of advisory firms, ”everyone will be expected to be in the office, which may be more difficult for firms in today’s hybrid work model,” according to Amy Lynch, president and founder of FrontLine Compliance.

Firms with hybrid work models should ensure “that most staff are in the office while the SEC is onsite,” Lynch advises.

“At least one senior person from each department needs to be there in the office to answer [SEC] staff questions as they come up — and they will come up,” Lynch said.

We caught up with Lynch — a former SEC staff accountant and special investigator at FINRA —to talk about the current compliance climate and what’s next that firms should brace for. One tip: Watch for an upcoming Risk Alert from the agency on the new marketing rule once the SEC has “some data to release from exams,” Lynch said.

THINKADVISOR: The SEC is planning more on-site advisor exams. What should advisors anticipate/do to prepare?

AMY LYNCH: Advisors need to understand they are dealing with a much more aggressive SEC than they are used to. [The Division of Examinations] takes its queues from IM [Investment Management Division] and IM is taking a very tough stance on the asset management industry.

This may be the most aggressive SEC since the mid-nineties. Firms need to conduct an evaluation of their compliance program and “kick the tires” via a mock audit if they have not done so within the past three years.

Marketing rule violations are highlighted in the SEC’s most recent risk alert on newly registered advisors. Any thoughts on this, and the alert itself?

First, on the marketing rule comments in the alert, that was not surprising to see given the focus in this area now. Although the staff pointed out that the exams covered within the alert were from before the Nov. 4, 2022, compliance date, they still made comments similar to more recent comments from current marketing-focused exams.

For example, the alert mentioned firms lacking substantiation of claims made in marketing materials.

This is a finding they are making today regarding compliance with the new marketing rule; they are just going a bit further now by stating that compliance itself needs to have a role in ensuring backup support exists for claims made in marketing materials.