Just over a year ago, I got one of those voicemails that can make an advisor nervous. It was the SEC letting us know that we had three weeks to prepare for an audit.
We weren’t completely unawares. My RIA manages an alternative investment fund; we knew we hadn’t been audited since inception four years prior. We also knew that we’d stuck out our necks a few months earlier with a marketing video that detailed our investment approach.
We had sent the video to about 200 people, including our investors and centers of influence, but the marketing firm that had worked with us — excited to be involved with one of the first firms to market a private offering fund under the JOBS Act — made a bit of a larger announcement about the video. It was picked up widely, and ended up being viewed by thousands of people worldwide.
Indeed, during a planning meeting at around the same time, I recall asking, “What could blindside us this year?” Our chief investment officer, Greg Stewart, offered: “We should be prepared for the SEC to come calling.” We wrote “SEC” on the whiteboard.
Before the examiners arrived, they sent us a request list of 50-plus files and documents — spanning a period of two years — that they’d potentially want to review with us. We forwarded the list to MarketCounsel, our compliance firm.
Its attorneys went over the list with us and explained the process. We’ve always had a strong compliance culture, so it turned out that most of what had to be done was just putting the information in the correct format. We were a little relieved.
When the SEC examiners arrived, they were pleasant but also serious. The in-office process only lasted two days. But then a few weeks later they asked for some supplemental information. And then asked for more. And then more.
The process dragged on for months. I understood why they were doing it, but I was frustrated because it was taking up a lot of my time.
We all say we’re the good guys, the fiduciaries, the anti-brokers. Sure, we know we’re the good guys. But who’s verifying? It’s the SEC’s job to assume that you’re doing things wrong, and it’s your job to show them that you’re not.
During one session they apologized for the disruption, and I told them, “I’m glad you’re here. It’ll make us a better firm.” I’m pretty sure I saw their eyes rolling, but it did make us better, and we’re more confident than ever that we’re doing things right.
Many firms dread this process, and it can be intimidating, but if you operate as a true fiduciary, take compliance seriously and have a stellar support system in place when (not if) the regulators come knocking, you too will emerge stronger.
Dan Darchuck is co-founder and CEO of Topturn Capital in Monterey, Calif.
Register or login for access to this item and much more
All Financial Planning content is archived after seven days.
Community members receive:
- All recent and archived articles
- Conference offers and updates
- A full menu of enewsletter options
- Web seminars, white papers, ebooks
Already have an account? Log In
Don't have an account? Register for Free Unlimited Access