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News June 29, 2015 Issue

Examiners on Site: Make the Visit a Success

The big day has arrived. SEC examiners will shortly walk through your front door for what will hopefully be no more than a two-to-three day visit. Are you and your advisory firm ready?

The SEC does not examine all that many firms. Even with added funding, only approximately one in seven will be examined each year, according to the agency’s FY 2016 budget request (ACA Insight, 4/27/15). Further, the SEC has made a point of targeting never-before-examined advisers, those with a history of past violations, and those engaged in certain activities, such as the management of alternative investments. If your firm does not fall into a target category, your chances of being examined are even less.

But you never know. You may get that document request letter tomorrow. The last thing any chief compliance officer wants is to be unprepared. And if your firm has never been examined or falls into a targeted risk area, all the more reason to make sure you’re ready.

How many examiners will arrive and how long will they stay? That depends on a variety of factors, including the size of your firm, what the exam staff wants to investigate, and what they find during the investigation. Typically, two to three examiners will arrive, but there may be more, said Wilmer Hale partner Matthew Chambers. The visit can last from one day to several weeks.

Preparatory best practices

Use the suggestions below to maximize the chances for a successful on-site examination:

  • Choose a point person. This person, who will be the main interlocutor with the examiners, is typically the CCO. "If you choose not to have the CCO as your point person, there better be a good reason. Otherwise it may cause examiners to think there is some problem with your CCO," said Chambers. Small firms may not have a standalone CCO, but someone at the firm will have that responsibility and should be the main  contact. The point person should sit in on all interviews that examiners have with other employees – nothing should be done without the CCO present. If examiners ask employees for information when the CCO is not there, those employees should tell the examiner to check with the CCO.
  • Provide a good, comfortable room for the exam team. This is their private room, where the examiners can talk, exchange ideas, review documents and more. The room should be within your firm and not at some remote location, but make sure it is not located near a site where employees group and talk, like the lunch room or the front reception area, said Mayer Brown attorney Adam Kanter. "You don’t want examiners to feel like they’re off in Siberia, but nor should they be right in the thick of things where they can overhear idle chatter from personnel."
  • Replace nervousness with calm competence. Staff will be understandably nervous when examiners arrive, but "it’s very important to make a good first impression," said Day Pitney counsel Eliza Sporn Fromberg. The best way to handle this is to make sure all employees are well-versed in what their departments do and how they comply with any regulations affecting their departments, she said. For instance, "receptionists at the front desk should show, if asked, how they track who comes in and out of the building."
  • Don’t volunteer unnecessary information. Make sure employees who may be interviewed understand this. "Answer what is asked, nothing more," said Chambers, who said he has seen a long deficiency letter result after a portfolio manager spoke too much.
  • Tell the truth. Sometimes employees think they are helping the firm by shading an answer a certain way or by providing misleading information, said Fromberg. That will actually hurt the firm when examiners later discover an employee was less than honest. Train all employees to answer questions honestly. If there are any issues that the CCO may not yet know about, make sure the CCO finds out about them prior to the on-site visit.
  • Highlight compliance during the introductory meeting. Most onsite examinations begin with an introductory meeting, during which the CCO lets examiners know about the corporate structure and perhaps provides an organization chart. Use this meeting to demonstrate that your firm is compliance-oriented and has a good tone at the top, said Fromberg. "Provide an overview of your compliance program and resources. Highlight any new additions, such as new compliance positions or programs," she said. Department heads should also attend, with perhaps each taking a few minutes to explain what their departments do. "Their presence will show that they take compliance seriously, since they took time from their busy schedules to attend," Fromberg said. Chambers suggested that, to prevent inadvertent comments, it is best that the comments by the CCO and all other firm personnel attending be scripted. But make sure the scripted comments are not too long nor give the impression of being too rehearsed, said ACA Compliance Group senior principal consultant Kimberly Daly, "That would be annoying to the examiners, many of whom prefer to control the meeting and ask questions based on their agenda, not what the adviser wants to present."
  • Prepare a document action team. Examiners typically send firms a document request list prior to their visit, but that doesn’t mean they won’t request more documents on site. In fact, odds are that they will. So prepare a team whose job it will be to find requested documents, said Kanter. With so many documents in the firm, how can you possibly anticipate which ones they will ask for? By reviewing any deficiency letters your firm received as a result of past examinations, and by reviewing the annual priority list published by the SEC’s Office of Compliance Inspections and Examinations, Fromberg said. Whatever topics are listed in those two documents will likely be the focus of examiner attention.
  • Keep track of everything examiners ask for. "If you can’t find something, let them know," said Fromberg. "Don’t let it just hang there and think it will go away." Assume that the examiners are keeping track of their requests – and will note that your firm was not forthcoming if you did not either provide the requested information and did not offer an explanation as to why it was not provided.
  • Do not have outside counsel on site. "It sends the wrong message, that you have something to hide, or that you expect things to get confrontational," said Kanter. Instead, after the examiners leave each day, conduct a daily debrief with your outside legal team. Let them know what happened that day and get their advice for the next day.
  • Avoid arguments at all cost, but correct factual errors. You want examiners leaving with the belief that your firm was cooperative and a partner with them in helping your firm stay in compliance. If an examiner mentions that there seems to be a problem, don’t immediately respond and don’t become defensive, said Chambers. "Calmly tell the examiner that you will study the situation and get back to him." If, on the other hand, an examiner makes a factual error because he perhaps missed something, you should point that out in a helpful way. You don’t want to see an issue cited in a deficiency letter that is inaccurate because an examiner had an incorrect understanding of how your firm works.
  • Listen during the exit interview. This is where the exam team, at the end of the visit, will summarize what it found. The best strategy here is to simply listen, Chambers said, calmly speaking up only when you need to correct any factual errors. "Sometimes, believe it or not, the SEC is wrong."