Episode 89: Preparing For a State Exam – Advice From a Former Regulator

On episode 89 of the CCO Buzz podcast, we discuss tips and tricks for preparing for a State Examination.


CCO Buzz: Hello and welcome back to the CCO Buzz! It’s here – It’s finally here! Summer is upon us! The team at Core Compliance wants to encourage all of our listeners to get out there and enjoy the summer. After 2020 and the way the first half of 2021 has gone- we all deserve it!


But, before you run out and enjoy the sun, we have a highly anticipated topic up for discussion today with Core Compliance’s Compliance Consultant. He’s here to unpack his recent Risk Management Update article, “How to Prepare for a State Exam: Tips from a Former Regulator,” which is due for release in a few days. 


Over the years, our audience has been demanding for more attention and more information on state exams; and with this former regulator on our team- we have some keen insight on the topic.


So, with that, let’s begin.


What do you feel are the biggest challenges when it comes to a state exam?


Core Compliance: Ahh, I discuss this in my article – it’s managing differences in state regulations from one jurisdiction to another and affording the resources to meet and maintain the required compliance regulations. Both can be heightened, or even compounded, during an examination by a state securities regulator.


And as a former state regulator that has examined hundreds of registrants over the last decade, I provide my audience a unique perspective on what to expect and how to prepare for a successful state examination throughout my article.


CCO Buzz: Oh, that’s great to hear! So, from your perspective, how does an examiner approach a state exam? Personally, I would think it’s a bit different than how a CCO or a Compliance department would approach it.


Core Compliance: In a sense, yes and no. We all follow the same basic structure: the request(s) for information, the review of information, and the determination of compliance. But examiners use this process as a systematic method to determine whether a registrant is, and has been, in compliance with the stated rules and laws that govern the registered activity of the specific jurisdiction. 


And this is not limited to just investment advisers. Many states also have jurisdiction of certain private equity firms, financial planners, and state-registered broker-dealers. Investment-related firms which request registration in any given state agree to abide by the rules and laws of that jurisdiction as part of the registration, which includes the right of the state to examine the registrant as determined by the state securities authority and governing law.


CCO Buzz: So, let me guess, in your article- you conveniently break down these three components and explain your take as a former regulator?


Core Compliance: *Laughs* I certainly do! In writing this article, I wanted to give our audience an understanding from an examiner – a glance behind the curtain, if you will.


CCO Buzz: Great! Now, I don’t want to be giving away your entire article to the CCO Buzz listeners. But is there anything you’d be willing to share with us?


Core Compliance: Sure, can I provide you with a small snippet from each component? There’s so much more than that that the article does offer – so you’ll just have to wait for the rest in the coming days.


But just briefly, during the request for Information phase, many smaller or new firms who have not been examined before are sometimes a bit overwhelmed by the volume of records to be provided. But most jurisdictions have the exam requirements posted publicly on their website and can direct you to the exact section of the rules and laws to review for the minimum requirements for an examination. I suggest checking with your specific regulator to know what to expect in advance. Preparation will be any firm’s greatest asset during an examination.


And with the review of Information phase, we do exactly that. Of the information provided we evaluate numerous components of your program, including fee structures and calculations, contracts, emails, just to name a few. Now, it’s important to note that the email review covers ALL emails, not just with clients. The review of information acts not only to cross-reference records for accuracy and compliance with the rules and laws of the regulatory authority but serves to determine if any potential red flags of fraudulent activity are present. Remember, the regulators’ primary goal is to ensure a safe and healthy securities market for investors.


When the examination hits the determination of compliance portion, as regulators, we are looking to identify the firms’ deficiencies. Most firms will likely have one or more deficiencies which the examiners will request to be corrected. The examiners will notify the firm in writing of the deficiencies and how to respond to them. Firms that are well prepared and have thoroughly tested their compliance programs will most often be the ones with no reported deficiencies.


CCO Buzz: Wow! Thanks for all of that. You’ve left me and the listeners wanting more! 


Core Compliance: Well, my article provides more insight into the examination process, so be on the lookout for its release!


CCO Buzz: Will do! Before we go, is there anything else you’d like to add?


Core Compliance: Yeah, as a former regulator I cannot stress enough the value of preparation. Firms that prepare and encourage a culture of compliance at the beginning will have a better opportunity to navigate a successful state examination. Whether a firm commits the resources internally or chooses to leverage compliance experts, such as Core Compliance, when the time comes for a state examination, they will be well prepared.


The Core Compliance team has many years of experience in assisting firms to prepare for regulatory exams and performing mock audits. For assistance or more information about our services, feel free to contact us at (619) 278-0020 or you can visit us at www.corecls.com for more information.


 CCO Buzz: Thank you for joining us today!


Core Compliance: Thank you.

 CCO Buzz: Well that’s it for this week’s episode. If you’d like additional information, please check out our website at www.corecls.com. You can also follow us on Facebook, LinkedIn, or Twitter @CoreCls. Thank you, and we hope you tune-in to next week’s episode of the CCO Buzz.



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