Each year, the SEC’s Division of Examinations — formerly the Office of Compliance Inspections and Examinations, or OCIE — publishes its examination priorities, signaling the areas it will focus on and encouraging firms to direct their compliance efforts toward areas of heightened risk. The SEC has steadily expanded its risk-based National Examination Program, and the federal securities laws authorize it to examine the records of SEC-registered firms whenever it deems necessary or appropriate to protect 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 help define the rubric for the SEC’s examination efforts — particularly as they relate to detecting possible violations of the securities laws, fostering strong compliance and risk management practices, and gauging how effectively firms have implemented current rules. One of the best ways to be ready is to see your firm the way an examiner would, before the examiner arrives. That’s where a mock SEC exam comes in.
What Is an SEC Examination?
An SEC examination is conducted to improve compliance, monitor potential risk, and inform regulatory policy. Exams are administered by the Division of Examinations and normally focus on current risks at a firm. There are three main types:
- Routine exams – It’s exactly what it sounds like: an inspection given periodically to see whether your firm’s policies and procedures align with SEC regulations.
- Sweep exams / risk assessment reviews – Given with little to no advance warning, these target a specific area of your firm’s practice and tend to focus on risks across the industry.
- Cause exams – Usually triggered by a tip, complaint, or referral. These are focused on the area of the concern but can expand to other areas for a more thorough examination.
To ensure your organization is ready for any type of examination, your firm should consider conducting a mock SEC examination.
Why Do Mock SEC Exams Matter?
Many firms are sharpening their focus on risk management and compliance by undergoing a mock SEC examination. By having an independent third party assess operations and risk management, a firm is in a far better position to address potential problem areas before they are uncovered by the SEC in a “real” exam.
To prepare properly, it helps to strategize for the SEC exam, conduct a mock exam or inspection, prep the firm’s staff on what to anticipate, and establish a plan for the entire process from the start. Reviewing the SEC’s current examination priorities — and confirming your annual review reflects them — gives your mock exam a meaningful, risk-based focus.
What to Expect During an SEC Exam
The length of an SEC exam varies case by case based on the size of the firm and how well its records are maintained. If the books are in good shape, an exam usually lasts somewhere between three and six weeks. There are several distinct parts to an SEC exam — here’s what most firms can expect once it begins.
- Part 1: Contact / Scheduling – Depending on the type of exam, the SEC staff will usually contact the firm first. Notice can range from a couple of days to a couple of weeks, though there are instances where the staff conducts surprise exams with no advance notice.
- Part 2: Entrance Interview – When the staff arrives onsite, they will request an interview with management to establish the firm’s compliance culture and learn more about the firm. This may surface potential red flags. The staff will also provide a brochure of the inspection process along with a copy of the Freedom of Information Act, the Privacy Act, and other applicable documents, and will typically want an onsite tour to observe operations.
- Part 3: Document Request – The firm will usually be given a list of documents and records the staff plans to review, based on the nature of the exam. While the staff reviews documents, it is important that they are not interrupted, or that any disruption is minimized.
- Part 4: Questions – Firms should anticipate frequent questions and designate a liaison to the exam team who is well-versed in firm operations and can direct staff to the appropriate person or policy. The more forthcoming the firm is, the better. If the firm has a concern about the exam, it can contact the staff’s supervisor or the Division of Examinations’ examination hotline, which provides an opportunity to speak with a senior attorney in the Division’s Office of the Chief Counsel or a staff member in the SEC’s Office of Inspector General.
- Part 5: Exit Interview / Call – To let the firm adjust its compliance practices as soon as possible, the staff will usually conduct an exit interview or conference call. Personnel with knowledge of or responsibility for operations, such as the COO or General Counsel, may participate. Deficiencies found will be discussed, and any outstanding documents will be requested with a timetable.
- Part 6: Results – At the end of the exam, the SEC decides what action, if any, to take based on the findings. Keep in mind that a letter with no findings does not necessarily mean a “clean bill of health” — it only means no deficiencies were identified during that exam.
What to Expect in a Mock SEC Exam
Core Compliance’s mock SEC examination services are designed to get as close to an authentic examination experience as possible. Our team meticulously reviews your firm’s policies and procedures (and/or Written Supervisory Procedures) to illuminate the focus areas of an upcoming examination. Our professionals bring decades of industry-leading experience to deliver an exceptional mock exam. Our process generally looks like this:
- The mock examiner begins by requesting documents to review before an onsite visit at the firm’s office.
- While onsite, the examiner interviews personnel, reviews systems, and assesses the adequacy of various safeguards and risk protocols.
- At the conclusion, the firm receives a written report identifying deficiencies or gaps in its compliance program.
- From there, the firm can prioritize implementation steps to improve its compliance program and identify the resources needed to strengthen its risk mitigation controls.
Frequently Asked Questions
What Is a Mock SEC Exam?
A mock SEC exam is a practice examination — typically conducted by an independent third party — that mirrors a real SEC examination. It surfaces compliance gaps, weak controls, and documentation problems so a firm can fix them before regulators find them.
What Are the Types of SEC Examinations?
The SEC’s Division of Examinations generally conducts three types: routine (risk-based) exams, sweep exams that target a specific practice area across the industry, and cause exams triggered by a tip, complaint, or referral.
How Long Does an SEC Exam Take?
It depends on the firm’s size and how well its records are maintained. When the books are in good order, the onsite portion often runs about three to six weeks, though the full process can take longer.
What Happens After an SEC Exam?
The SEC decides what action, if any, to take based on its findings. A deficiency letter identifies issues the firm must remediate — and even a letter reporting no findings should not be treated as a clean bill of health.
Prepare Before the SEC Comes Knocking
The firms that fare best in an examination are the ones that found and fixed their gaps first. Core Compliance regularly conducts mock SEC exams and provides exam readiness and ongoing compliance support so your firm can walk into an examination prepared and confident. For additional information, contact us at (619) 278-0020 to schedule a consultation.
