Compliance Solutions for Investment Advisers

FAQs — SEC Examinations

 

Examination Basics

Who conducts examinations of SEC-registered investment advisers?

Examinations are conducted by professional examination staff from one of the SEC’s regional offices or from its headquarters in Washington, DC. The Office of Compliance Inspections and Examinations (commonly referred to as OCIE) is responsible for the SEC’s overall examination program.

How does the SEC determine which advisory firms are selected for examination?

OCIE’s investment adviser examination program utilizes a risk-based process, identifying higher-risk investment advisers for examination consideration and focusing examination resources on certain higher-risk activities at selected investment advisers. The reason why an advisory firm has been selected for examination is non-public information and typically will not be shared with the advisory firm under examination.

What types of examinations of investment advisers does OCIE conduct?

OCIE generally conducts three types of examinations: (i) examinations of higher-risk investment advisers; (ii) cause examinations resulting from tips, complaints and referrals; and (iii) special purpose reviews such as risk-targeted examination sweeps and risk assessment reviews.

What is a “higher-risk” examination?

The SEC categorizes certain investment advisers as higher-risk. The SEC aims to examine higher-risk advisers every three years. Typically, higher-risk investment advisers are identified based on: (i) information contained in regulatory filings; (ii) assessments made during past examinations; and/or (iii) other criteria and available information (including, for example, news/media coverage, localized knowledge of advisers from examination staff and tips, complaints or referrals). Specific factors that may contribute to a higher-risk categorization include whether the advisory firm:

  • Is of large enough size that non-compliance could adversely affect a significant number of investors;
  • Has compliance controls or supervision that appear to be weak, such as a poorly drafted ADV;
  • Has employees with disciplinary histories;
  • Is involved in activities with the potential for increased compliance risks;
  • Has an affiliated broker-dealer or has multiple affiliated businesses; and/or
  • Was found to have severe or significant problems during its last examination.

What is a “for cause” examination?

A cause exam may be triggered by an individual reporting a past, current or imminent securities law violation, by a media report or by the SEC’s own routine or risk-based exam which determines that there is cause for concern about compliance with the securities laws.

What is a “sweep” examination?

Sweep exams are used to review a compliance issue that the SEC considers a risk across multiple firms. In recent years, sweep exams have been conducted in the areas of social media, custody and pay-to-play.

Is there any such thing as a “routine” examination?

Due to a lack of resources, routine examinations of investment advisers are less common than they once were, but they may still occur on a random basis and any advisory firm may be subject to one. A routine exam does not mean that the SEC has any suspicion about the advisory firm or that the advisory firm has done anything to raise the SEC’s concern about its compliance.

Does an investment adviser receive prior notice of an examination?

Examinations may be conducted on an announced or unannounced basis.

What would be the reason for an unannounced examination?

Typically, unannounced examinations are the result of a client complaint or some other indication of wrongdoing by the advisory firm. If the examination is unannounced, as soon as the examiners arrive they will provide the advisory firm with an information or document request list and conduct an initial interview. During the initial interview, the examiners will go over the information or document request list to ensure that the adviser understands the information and documents requested.

Are announced examinations more typical?

Yes. Announced examinations are considered more typical and are preceded by a letter notifying the adviser of the examination and containing a request list that identifies certain information or documents that SEC examiners will review as part of the examination.

 

The Examination Request List

Are all SEC examination document request lists the same?

What type of documents are requested will depend on a number of factors – the type of examination being conducted (e.g., a limited sweep exam versus full-blown audit); the regional office conducting the examination (e.g., the New York regional office seems to have the most extensive document request list) and any current directives from the national office (e.g., the move towards a more uniform examination request list).

What type of documents are typically requested for a routine examination?

Examiners may request any specific record an adviser is required to keep under Advisers Act Rule 204-2 (e.g., the Books and Records Rule) as well as any document generated as a result of the advisory firm’s compliance program.

How long does an advisory firm have to collect all the required information?

Generally, ten days to two weeks.

How are the requested documents required to be delivered to the SEC?

The examiners may request that certain of the information and documents be provided in an electronic format. The request list may ask that the information and documents: (i) be delivered to the SEC’s offices by a specified date; (ii) be made available for review at the advisory firm’s offices on a specified date; or (iii) some combination of the two.

What should an adviser do if they do not understand a particular request?

An adviser should communicate promptly with the examiners if they have any questions about the documents or information requested.

 

The Structure of an SEC Examination

What happens after the initial request list is sent and the information is compiled?

The examiners will visit the advisory firm to conduct examination work on-site. The examiners will conduct an entrance interview with a member of the firm’s top management responsible for compliance. The interview allows the SEC to get to know the advisory firm and formulate an initial impression of the depth of adherence to the compliance policies and procedures. The examiners may also ask for a walk-through of the advisory firm’s offices to gain an overall understanding of the firm’s organization, flow of work, and control environment.

What happens after the initial phase of the examination?

The examiners will review the information and documents provided by the advisory firm. During this review, the examiners may make supplemental requests for additional information and documents. They may also request meetings with firm employees to discuss the advisory firm’s operations and the information and documents provided. The examiners may also request relevant information and documents from third parties that, for example, perform work for, or in conjunction with, the advisory firm or where the third party activity may have a material impact on the firm.

How long will the on-site phase of the examination take?

That is entirely firm and examiner dependent. Examinations can last just a few weeks or stretch on for months.

What happens at the end of the on-site portion of the examination?

On the last day of the on-site visit, the examiners will typically conduct an “exit interview” during which they will discuss the status of the examination and any outstanding information and document requests and, if appropriate, the issues identified during the examination to that point. During an exit interview, the firm will be given an opportunity to discuss any of the issues that the examiners found and provide additional relevant information, including with respect to any actions that the firm has taken or plans to take to address the issues.

How is an SEC examination completed?

When an examination has been completed, the advisory firm will be sent a written notification. This notification will generally take one of two forms: (i) the examination staff may send the firm a letter indicating that the examination has concluded without findings (often referred to as a “no further action letter”) or (i) the examination staff may send the firm a letter that describes the issues identified, asks the firm to undertake corrective action and to provide the staff with a written response outlining those actions, and possibly requests a conference at the SEC’s office (often referred to as a “deficiency letter”).

What if serious problems are found during the examination?

If serious problems are found, in addition to sending the advisory firm a deficiency letter, the examination staff may refer the problems to the SEC’s Division of Enforcement, or to a self-regulatory organization, state regulatory agency, or other regulator for possible action. The following criteria are among those used to make an enforcement referral:

  • Does it appear that fraud has occurred?
  • Were investors harmed?
  • If the conduct does not include fraud, is it serious (ongoing, repetitive, systemic or severe)?
  • Did the firm make the SEC aware of the conduct and take meaningful corrective action?
  • Is the conduct of a type/degree that is most appropriate for the SEC to handle, rather than another regulator?
  • Is the activity in a particular area that the SEC wants to emphasize (emerging types of wrongdoing)?
  • Did the actor profit from the conduct?
  • Did the actor appear to act intentionally?
  • Is the conduct recidivist in nature?
  • Were the firm’s supervisory procedures inadequate?

When is the written notification that the examination has concluded sent?

Written notification that the examination has concluded will generally be sent to the advisory firm no later than 120 days following the end of the fieldwork phase of the examination. The firm will be asked to respond in writing to any issues identified in a deficiency letter, including any steps that it has taken or will take to address the problems and to ensure that they do not reoccur.

How long does an adviser have to respond to a deficiency letter?

This response will generally be due within 30 days of the date of the deficiency letter.

What if an adviser has a complaint about the examination process?

An adviser may communicate comments, complaints, or concerns through the Examination Hotline, (202) 551-EXAM. The Examination Hotline offers an adviser a choice to speak with either a senior-level attorney in the Office of Compliance Inspections and Examinations in Washington, DC, or a staff member in the SEC’s Office of Inspector General. The Office of Inspector General is an independent office within the SEC that conducts audits of Commission programs and investigates allegations of employee misconduct. When you speak with staff on the Examination Hotline, you may identify yourself or request anonymity.

 

Important Information

The information contained in this Frequently Asked Questions is only a summary and is not intended to be a comprehensive analysis of the rules and regulations applicable to registered investment advisers. It is not intended to constitute legal or compliance consulting advice or apply to any one investment adviser’s particular situation. For more information, please see our Terms of Use.

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