SEC exams are on the rise
WASHINGTON -- After a lull during the government shutdown, SEC advisor exam rates are on the rise. Firms that haven't been examined in several years may be likely expect to hear from their regulator soon.
The question then becomes how firms will respond "when the proverbial knock on the door comes," as Mark Perlow, a partner at the law firm Dechert and a former senior staffer at the SEC, put it during a panel discussion here at the Investment Adviser Association's annual compliance conference.
Experts say that it helps to understand that the typical exam begins with pre-examination requests for documents that occur weeks — even months — before the SEC arrives at the firm's office, if it even gets there at all.
Firms that respond quickly to the document requests will be doing themselves a favor, said Mary Keefe, director of regulatory affairs at Nuveen Asset Management, who stressed how “important it is to establish a really good relationship with the examiners when they walk in."
"When you get that letter, don't ignore it," said Keefe, a former regional director of the SEC's Chicago office. "Call them immediately and begin to develop the relationship that you're going to need through the entire exam process."
Starting off on the right foot can set a collaborative tone for the whole process, which could make the exam feel more like a routine trip to the dentist, rather than a full-on root canal.
For instance, SEC examiners will set the scope of their review of a firm ahead of time, but the document requests that come out of that process are not written in stone, according to Mark Dowdell, assistant regional director at the SEC's Philadelphia office. He describes the document production as more of a negotiated process, where examiners will often be receptive to appeals from the firm to scale down the amount of material they want to review.
"Talk to the examiners. Talk to the exam managers," Dowdell said. "There might be some leeway here."
When examiners do show up at the office, Keefe suggests that firms offer to give a presentation about how their organization is structured, laying out the business and compliance practices up front to help the exam staff get acclimated.
The regulator is going back to some of the firms that voluntarily settled, requesting information on revenue sharing.
Actions against advisors and fund companies accounted for nearly a quarter of all standalone cases, even while budget constraints and legal setbacks hobble enforcement efforts.
Advisors who should self-report a violation — but don’t — could face enforcement actions.
Last year, the SEC examined around 2,300 advisors a 9.4% increase from the previous year, Dowdell said. That uptick was the result of a combination of factors, including an internal reorganization to increase the number of examiners focusing on RIAs, as well as a shift toward more targeted, less involved examinations that enabled staff to reach more firms.
The recent government shutdown was a setback to the exam program, Dowdell acknowledges. At his office in Philadelphia, he expects advisor exam rates this year to be flat or to fall off slightly because of the shutdown. Nationwide, the SEC is unlikely to report another steep increase in exam rates this year because of the time it was operating with a skeletal staff, even though exams have now resumed in earnest.
"We were shut down for five weeks," Dowdell said. "We're just really getting back into the groove."