The Importance of Having a Mock SEC Exam

The Securities and Exchange Commission’s (SEC) Office of Compliance and Examinations (OCIE) have recently released their 2020 Examination Priorities.  As expected, the SEC has significantly expanded its regulatory examination program, and continues to make efforts to strengthen its risk-based approach to the National Examination Program. The federal securities laws authorize the SEC to conduct examinations of all records maintained by SEC-registered firms at such times as the SEC deems necessary or appropriate in the public interest or for the protection of investors.

Over the years, the Dodd-Frank Act has significantly impacted  the SEC’s National Examination Program, by expanding the scope of the SEC’s examination authority and increasing its examination responsibilities.

Every year’s exam priorities enlighten  and significant expands the definition and rubric for SEC’s examination efforts particularly as it relates to detecting possible violations of the securities laws and regulations, fostering strong compliance and risk management practices, as well as providing the SEC with information about the effective implementation of its current rules.

What is an SEC Examination?

An SEC examination/exam is given in order to improve compliance, monitor potential risk, and inform regulatory policy. The exams are administered by OCIE and they normally focus on current risks at a firm. There are 3 different types of exams:

  • Routine Exams
    • It’s exactly what it sounds like; an inspection or examination given every so often to see if your compliance firms Policies and Procedures align with SEC regulations.
  • Sweep exams/risk assessment reviews
    • Given with little to no warning at all, but specifically target an area of your firm’s practice. These tend to focus on risk throughout industry-wide compliance.
  • “Causal” exams
    • Usually administered because of a tip or complaint. These exams are focused or targeted on the area of the complaint or tip, but can also encompass other areas for a more elaborate examination.

To prepare and ensure your organization is ready for any type of examination, your firm should consider conducting a Mock SEC Examination.

Why do mock exams matter?

Many firms are reacting by increasing their focus on risk management and compliance, and undergoing a mock SEC examination. By having an independent third-party help assess operations and risk management, the firm is in a better position to address potential problem areas before they are uncovered by the SEC in “real” examination.

In order to prepare and take the necessary steps to ensure everything is in order for an exam, it’s best to strategize for the SEC exam, conduct a mock exam or inspection, prep the firm’s staff on the process and what to anticipate, as well as establish a plan for the entire inspection process from the start.

SEC Exam Protocol

The length of an SEC audit varies case by case based on the size of the company and how well your records are maintained. However, if the books are in good shape then it usually lasts somewhere between three to six weeks.

There are different parts of an SEC exam or inspection. We’ve broken it down to provide firms an idea of what is most likely going to happen once the audit begins.

  • Part 1: Contact/Scheduling
    • Depending on the type of inspection or exam, this will determine whether or not the SEC staff will contact the firm, but in most instances they will. Notices can range from a couple days to a couple weeks, however there are instances where they conduct surprise exams with no advance notice.
  • Part 2: Entrance Interview
    • When the SEC staff arrives onsite at the firm’s office, they will request an interview with management. The goal of the interview is to establish the firm’s compliance culture and to learn more about the firm. This may bring to light potential red flags; which may be an indication on how the inspection will go.
    • The SEC staff will provide the firm with a brochure of the inspection process and a copy of the Freedom of Information Act, the Privacy Act and other applicable documents.
    • Post-interview, the staff will most likely want an onsite tour of the office in order to observe operations. This gives them insight on how you run your business.
  • Part 3: Document Request
    • The firm will most often be given a list of documents and records by the SEC of what they plan to review. Specific documents will be requested based on the nature of the inspection.
    • While the SEC staff reviews the documents, it is crucial that they are not interrupted, or the disruption is minimized.
  • Part 4: Questions
    • Firms should anticipate that staff will frequently have questions, and designate a liaison to the inspection team. This person should be well-versed regarding firm operations so they may direct staff to the appropriate party, department, or policy.
    • Questions can be about anything from information about the company, to specific documents. The more forthcoming the firm is with information and answers, the less it looks like you have something to hide.
    • If the firm has a complaint, concern or even a question about the exam, they can contact the staff’s supervisor or the OCIE Examination Hotline which gives the firm an opportunity to speak to a senior-level attorney in the OCIE’s office of the Chief Counsel in DC, or a staff member in the SEC’s Office of Inspector General.
  • Part 5: Exit Interview/Call
    • In order to allow the firm to adjust their compliance practices as soon as possible, the staff will most likely conduct an exit interview or conference call as part of the process. Personnel that had knowledge about or had responsibility about the operations like the COO or General Counsel will be allowed in the interview.
    • Deficiencies that were found will be discussed and outstanding documents that were needed during the exam will be requested along with a timetable for when they are needed by.
  • Part 6: Results
    • The end of the exam or inspection is when the SEC decides what action needs to be taken from the results of the findings.
    • Keep in mind that a letter with no findings, does not necessarily mean a “clean bill of health” and should definitely not be viewed as such. All it means is that no deficiencies were found during the exam.

What to Expect in your Mock Exam?

Core Compliance’s Mock SEC Examination Services try and get as authentic of an experience to benefit your company as best as they can. Out team meticulously investigates your firm’s policies and procedures and/or Written Supervisory Procedures to illuminates focus areas for an upcoming examination. Our mission is to empower our clients in order to achieve success. Our professionals have industry-leading experience and expertise, with decades of experience to provide an exceptional mock SEC exam experience. Our process for the mock examination is outlined below.

  • The mock examiner typically begins the process by requesting documents to review before an onsite exam at the firm’s office.
  • While onsite, the examiner will interview personnel, review onsite systems and assess the adequacy of various safeguards and risk protocols.
  • At the conclusion of the process, the firm will be issued a written report identifying deficiencies or gaps in the firm’s compliance program.
  • From this, the firm can identify implementation steps to improve the compliance program and identify necessary resources to enhance the firm’s risk mitigation controls.

CCLS regularly conducts mock SEC exams for its clients. For additional information, please contact us at info@corecls.com or by phone at (619) 278-0020.