Ready for Your Next Regulatory Exam? Here’s How to Survive.

Posted by Andrea Collatz on May 1, 2013

Be sure to watch the webinar: How to Survive a Regulatory Exam.

Are you prepared for your next regulatory exam? If it’s been awhile since you’ve had an exam, or if you’ve never had an exam, it’s important to prepare so you have the best possible outcome.

The SEC says they have the manpower to give about 9% of SEC registered advisors an exam. This works out to an advisor having an exam by the SEC about once every 10 years, while the frequency of state exams vary. To make the exam process as smooth as possible, here is what you can typically expect: 

1. Exam Notification

You will be notified of the exam by writing or phone call, or you may have a surprise exam (both the state and the SEC have the right to give you a surprise exam). Knowing the type of exam beforehand will help you get a sense of the tone of the exam. 

Remember that the time of notification is not the time to start your compliance program. You should have practiced good compliance along the way, and it’s important to follow up on items that may have slipped on your to do list. The three typical types of exams you can expect are: 

  • Routine Exam – Exist to help firm, investors, and industry.
  • Exam for a Cause – Rises from a complaint. Examiners may look at you with a more critical eye.
  • Sweep Exam – Less common, the examiners are looking for answers to a specific industry issue. This exam is usually less intense.

2. Initial Documents Request

The intial documents request phase is your chance to make a good first impression. Deliver as much information as you can in an organized manner to start off on the right foot. You’ll be asked to provide a number of documents to the examiners which may include:

  • Organization structure and financial records
  • Compliance manual, risk assessments, and internal controls
  • Trading, portfolio management, and brokerage agreements
  • Client records and agreements
  • Conflicts of interest
  • Performance reporting
  • Custody and Control

3. During the Exam

Throughout the exam process, you’ll want to create a good partnership with the examiners. Make sure they are comfortable and check in on them at the end of each day to ensure they have what they need. Continue to be responsive on any additional requests (yes there will be more requests) and keep an open dialogue. Remember it’s okay to say “let me check on that” if you are not 100% sure of the answer, and get back to them in a timely fashion.

4. Examination Findings

During the exit interview, you’ll get an idea of things that still need to be done and when you”ll receive a final report. You may receive:

  • Written notice exam concluded without findings.
  • Deficiency letter listing items to correct. This is more common.
  • Referral of violation for enforcement. This occurs when the examiners find an issue they are going to refer to the enforecement division, resulting in a new exam.

Be sure to respond to their final letter and follow up to fix any deficiencies. Often you’ll be advised of things you can do to correct and improve your practice. Clarify what those things are and what you will do to improve them in writing. Most importantly, stick to your word and correct issues so they don’t come back to bite you in the future.

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