WealthManagement Magazine
Surviving an SEC Audit

Surviving an SEC Audit

Now that you know how to prepare for an SEC examination, you need to know what to do when the examiners actually walk through your door




Surviving an SEC Audit

Now that you know how to prepare for an SEC examination, you need to know what to do when the examiners actually walk through your door. Read on for some tips on making it through the process.

Identify a contact person at your organization
Typically this will be the chief compliance officer or someone very close to him or her. It’s important to have someone responsible for gathering and organizing data and also to be able to control document flow. “You don’t want more than one person giving the SEC documents and then you’re not sure what they have,” says Bart J. McDonald, executive vice president at Renaissance Regulatory Services Inc., a compliance consulting firm in Boca Raton, Fla.

Set ground rules
Let the SEC examiners know upfront who will be helping them from the firm if they need copies, water or anything else. If you let them roam the office, you start to lose control of the process, says Dawn Bond, executive vice president of Compliance Advisory Services Inc., a Newnan, Ga., compliance consulting firm for broker/dealers and investment advisors.

Provide the information requested
Give SEC examiners what they ask for, but don’t provide information that’s not relevant, says Brian C. Daughney, a partner in the New York City office of the law firm LeClairRyan. Let’s say they ask about trading records in a particular security over the past three months. Don’t give them all your trading records. “It sounds simple, but this stuff happens,” he says.

Also, make sure you aren’t providing documents that are protected by attorney/client privilege because there’s a high risk that, by doing so, you will have waived the privilege, says Nicolas Morgan, a partner in the Los Angeles office of law firm DLA Piper.

Don’t be afraid to ask for clarification
There’s nothing wrong with respectfully telling examiners that you don’t understand a request. Confusion can sometimes be mistaken for caginess, which gives examiners a bad impression of your firm.

It’s also okay to tell examiners that their request seems too broad. “Don’t be afraid to say, ‘This will be 40,000 e-mails. Can you be a little more specific, so we can get you what you need?’” says Daughney.

Don’t make it harder than it has to be
If you don’t have the records in the format the examiners are looking for and you’re struggling to get it together, talk to them. They may not care about that one piece and you can tell them what you do have, says Buddy Doyle, managing director of Oyster Consulting LLC in Richmond, Va.

For example, if you have the requested information in PDF format, but they ask for a spreadsheet, it’s okay to ask if a PDF is all right—provided you make clear you’re willing to do a spreadsheet if your way is not an acceptable alternative.

“That way, they don’t feel that you’re unorganized or you’re trying to delay them. Sometimes they’re okay with what you give them, even if it’s not in the exact format or exactly what they were looking for,” Doyle says.

Treat the SEC examiners with respect
Set aside a dedicated area for SEC examiners to work. “You don’t want them sitting out in the middle of your trading floor. You want it segregated from the rest of the firm and you want to protect the integrity of that space while they are there. When the SEC leaves at 6 p.m., no one goes in that room. When they leave for lunch, no one goes in that room,” Daughney says.

Also, be considerate. Don’t put them in a room with no windows in 80 degree weather. Or if it’s cold, don’t put them in a room with no heat, says Bond of Compliance Advisory Services.

“Regulators are not the bad guys. They are doing a job. Their job first and foremost is to protect the interest of the clients,” she says.

Don’t state wrong facts or intentionally falsify information
If you don’t know something, get the facts before you respond. Don’t speak off the cuff, says McDonald of Renaissance Regulatory Services. Also, don’t falsify information.

Many firms, for example, have trouble completing personal securities transaction reviews within the required time frames. If you’re late, it’s a deficiency, but a minor one. If you backdate the forms and the SEC discovers it, you’re looking at an enforcement referral, says McDonald, who is a former SEC examiner and branch chief.

“I’ve seen CCO’s and compliance officers who’ve gotten into significant trouble affecting their careers because they were worried about a books-and-records violation,” McDonald says.

Think in duplicate
Make a copy of everything you give examiners. If the SEC calls you with questions about a particular document, you must be able to retrieve it from your audit file, which you can’t do if you haven’t kept a copy, Bond says.

Have two people from the firm sit in with examiners during an interview—one to take notes and the other to do the talking. “That way, you’re clear on what was said and what was asked for, so there’s less chance of miscommunication,” McDonald says.

Fix any problems in a timely manner
Ideally, you want to address them while the SEC is on-site. It doesn’t hurt to ask how things are going, so that if there is a problem you can address it before a deficiency letter is issued, McDonald says.

Consider involving an attorney if a serious problem is discovered
In many cases, the issues the SEC will uncover will be benign and easy to fix. But it is possible that an examination will uncover something more serious. If that’s the case, it makes sense to retain counsel.

For example, Morgan of DLA Piper remembers an advisor years ago who was, without the knowledge of his firm, siphoning money. In such a case, it makes sense to have counsel involved so the firm is protected, Morgan says.

More information on the SEC examination process can be found at www.sec.gov.

Questions or feedback? Please email us at [email protected].

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