Seven Tenets for SEC Exam Preparation
Each General Counsel (“GC”) and Chief Compliance Officer (“CCO”) faces the innate pressures of preparing for a U.S. Securities and Exchange Commission (“SEC”) exam and, ultimately, leading their firm to a successful result. The best method(s) for preparation are consistently discussed, and often debated, at roundtables and seminars.
Below are a summary of seven key tenets that should be addressed prior to the SEC’s arrival. Addressing these seven core tenets will help lead to a successful exam result:1
1. Show a tone from the top: You should be able to demonstrate that your principals and senior management are well-versed in the compliance program and aware of the key compliance issues faced by the firm.
2. Core compliance documents: You should ensure that you have your core compliance documents in place and up to date. That includes the firm’s (i) compliance manual, (ii) code of ethics, (iii) risk log and (iv) forensic testing procedures.
3. Forensic testing: The SEC will expect that you have conducted forensic tests in each core compliance area to identify and mitigate potential issues and confirm that your firm’s policies are effectively implemented.
4. Compliance Staffing/Resourcing: You will need to show that you have resourced the compliance department with the proper number of skilled employees. You will also need to show that the compliance team is empowered and has the ability to effectively carry out their assigned tasks.
5. Ability to produce materials: You will need to confirm your technology team and vendors are ready to produce large amounts of data. This will include the ability to accurately and timely produce trading records and emails/IMs. You will want to identify any potential systems issues that could cause delays in providing timely responses to data requests.
6. Preparing your employees/business units: You will need to prepare not only your compliance staff for the exam, but also key personnel and heads of business lines for both document requests and interviews.
7. Testing your compliance program readiness: You will need to pressure test your compliance program and controls through a mock audit to ensure they address each rule/regulation relevant to your firm and identify potential weaknesses.
While there are a multitude of additional items that go into the success of an SEC examination, focusing on these seven key tenets will certainly help get your firm prepared for when the SEC comes calling.
When the SEC Arrives – Key Reminders
• It is critical to treat the SEC staff with professional courtesy for the entirety of the exam. This starts with setting the SEC staff up in a comfortable conference room and must continue for each interaction.
• You should make all efforts to meet the deadlines for SEC requests and, if it is clearly not possible, you should reach out to the SEC staff as soon as possible to discuss potential delays and request an extension. All requests for extensions should be made in writing and all SEC approvals should be documented in writing as well.
• You must remember that the exam is a marathon and not a sprint. While your energy may be very high at the outset, fatigue may set in as the weeks, and possibly, months pass. The key is to be prepared for a long process and to prepare your employees for the prospect that the exam will not necessarily be over shortly.
• Lastly, it is critical that you keep your compliance program up to date during the exam. This may lead to longer hours and higher stress levels for your staff – and you may need to bring in additional resourcing to help field the workload. An exam may feel like a full-time job, but remember that you cannot forget your core compliance responsibilities and will not be forgiven if you fail to meet them.
The Exit Interview and Deficiency Letter
When you are at the end stage of your exam, the SEC staff will set an Exit Interview. You should expect a subsequent deficiency letter, as the vast majority of exams result in the receipt of one.2
It is critical that you listen very carefully during this Exit Interview and take detailed notes. The SEC Staff will outline what they believe are the core deficiencies identified during the exam.
After the Exit Interview and prior to receipt of the deficiency letter, you should start working on remedying the cited deficiencies. You will want to make correcting any and all deficiencies a top priority for your firm. You should create a detailed action plan that addresses each deficiency, along with the employees responsible for completing the task(s).
The key to successfully addressing a deficiency letter is (i) methodically working through each item, (ii) ensuring you can evidence your progress and (iii) clearly showing how you remedied each issue.
The SEC will use this deficiency letter as a guide for their next exam. The SEC will want to see that your firm has dedicated time and resources to remedying their concerns. If the issues are not remedied to the SEC staff’s satisfaction, your firm may be facing an enforcement action.
As Sun Tzu stated, “Every battle is won before it is ever fought.” Taking the time to properly prepare for an examination will pay dividends when you receive the initial request letter and throughout the full examination process.
1| The vast majority of SEC exams end in a deficiency letter. The goal is to keep these deficiencies to a minimum and on benign topics.
2| If your firm is facing a potential enforcement action, you will be notified by the SEC staff and you should immediately seek the advice of counsel on how best to address this issue. You may have the opportunity to respond in writing to a Wells Notice and should seek legal advice for such matters.
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