Updated Monday, July 28, 2014 as of 8:42 PM ET
Blogs - Practice Perfect
Never Before Examined? How to Prepare for an SEC Exam
by: Jillian Timmermans and Amelia Stoj
Thursday, May 1, 2014
Partner Insights

3. Critically review your firm’s marketing materials. As part of this review, firms should look out for misleading information, inconsistencies across marketing materials and a lack of back-up materials to substantiate claims. For example, a firm may be penalized if the materials discuss the performance of the entire portfolio but do not note that one investment represented a material portion of the whole return. In the past, the SEC has also looked for discrepancies between the information contained in marketing materials as compared to information posted to an advisor’s password-protected website or provided in a regulatory filing (Form PF, for example). To prevent inconsistencies in marketing materials, firms should implement a formal review process across all materials, including ADV disclosures. Language must also be used carefully so that it is not misconstrued or promissory in nature. Often, qualifiers such as “generally” and “seeks to” can be used to help soften statements made.

4. Evaluate all conflicts. In addition to identifying violations, firms should also evaluate all conflicts ahead of time and work to create a process to identify actual and possible conflicts, such as incorporating the use of employee reporting forms for things such as gifts and outside interests. For example, in one firm the SEC uncovered several directorships for key portfolio personnel that had not been identified by the CCO. Just as important as identifying the conflicts is the manner in which they are addressed. Advisors need to be able to evidence to the SEC that they are properly mitigating conflicts (disclosing the conflict when necessary, reviewing gifts/business entertainment in connection with best execution reviews, etc.). The development and documentation of these processes should also be a key focus of the advisor’s Annual Review Memorandum.

5. Prepare internal audit prep files now. In addition to collecting documents, consider how your firm will be presented to the SEC when it is time for an examination. Everything from your firm’s background, prep interviews with key employees, and ownership to the enhancements made to the compliance program should have a role in your firm’s ‘story’.

Notice of an SEC examination can often send panic through an organization, especially those that have no prior experience being examined. But taking preparatory steps such as those highlighted above should go a long way in easing your firm’s worry. It is always prudent for RIAs to regularly review their business practices against compliance requirements, regardless of the possibility of examination. The never-before-examined initiative merely underlines this truism.

Jillian Timmermans and Amelia Stoj are both partners and vice presidents of Cordium, a compliance and regulatory services provider.


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