WealthManagement Magazine
Preparing for an SEC Audit

Preparing for an SEC Audit

It had been several years since Frontier Asset Management LLC had a routine examination, and Scott A. MacKillop knew

Preparing for an SEC Audit

It had been several years since Frontier Asset Management LLC had a routine examination, and Scott A. MacKillop knew it was only a matter of time before examiners from the Securities and Exchange Commission came knocking.

So instead of sitting back and waiting, MacKillop, president and chief compliance officer, set out to make sure the Sheridan, Wyo.-based firm was as prepared as possible.

He first obtained a copy of an SEC request letter that the agency sends to registered investment advisors it intends to visit.

“My first response was, ‘Oh my G-d, that’s a lot of information,’” says MacKillop. His next step was to make sure his firm could supply all the documentation listed in the letter—just in case. This exercise paid off. It exposed some areas that needed work and better prepared the firm for the call that came nine months later announcing the SEC would be on-site in six weeks.

“If we hadn’t been very organized in the first place, it would have been very hard, even given the six weeks we had,” MacKillop says.

To be sure, there’s a lot of preparation that goes into a visit by the SEC well before the regulator walks through the door. It starts with an attitude from the top that examinations, while annoying and disruptive, are inevitable. It’s also important to expect—especially post-Madoff—that the examination will be extensive. In Frontier’s case, for example, examiners verified the existence of every account and the amounts in them with the custodian and asked the firm to explain any inconsistencies.

Exams can happen at any point. How often the SEC visits depends on factors such as the size, type and compliance history of the firm, so it’s a good idea to stay on your toes. “If you haven’t had one in more than five years, make sure you’re ready,” says Buddy Doyle, managing director of Oyster Consulting LLC in Richmond, Va.

Your firm can do many things to prepare for a visit from the SEC. Organization is crucial. So is proper documentation. “It’s not enough to just do things right. You also have to document that you do things right,” MacKillop says.

Even before examiners arrive, you should identify and have your audit team in place, says Brian C. Daughney, a partner in the New York City office of the law firm LeClairRyan. Determine who at the firm holds the information and material likely to be requested and identify who will be responsible for interacting directly with SEC staff. If you’ve had prior exams, look back to see who at the firm was most helpful and consider tapping those same people again, Daughney says. Also, make sure you know the specifics of any prior SEC examinations. What did the SEC comment on before? How did the firm address these issues? Are these prior issues resolved or still lingering?

As evidenced by Frontier’s experience, it’s a good idea to get a copy of what you think the SEC is going to ask for, which isn’t too hard, but it might take some digging. You can, for example, ask other advisors who have recently undergone examinations. Also, ask your outside counsel or search the Internet for a copy of the request letter.

Familiarize yourself with issues that are currently high on the SEC’s agenda such as fraud detection and prevention and anti-money laundering. This information can be found by browsing the SEC’s website, or by reading industry publications. You can use the SEC’s website to obtain more information about the examination process and become familiar with common areas examiners look at including compliance programs, portfolio management, brokerage arrangements, personal trading, marketing, information processing and the safety of client funds.

Once you have a better idea of what the SEC looks at, test your firm’s policies and procedures to see how they measure up. If you do identify an area where your firm needs work, don’t wait until the SEC visits to fix it. For example, after having seen the sample letter from the SEC, MacKillop identified that Frontier’s trade error documentation wasn’t as strong as it should have been, so the issue was fixed before the examiners arrived.

For newer firms, it can be helpful to do a mock audit of your firm. The time to do this is during the first 12 to 18 months after being registered, says Dawn Bond, whose Newnan, Ga., compliance consulting firm, Compliance Advisory Services Inc., performs these audits. “Because if you don’t start out right, it’s going to be a struggle all the way through,” she says.

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

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

TAGS: Research
Hide comments


  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.