Episode 40: Tips on How to Prepare for a Regulatory Examination

We feature Core Compliance’s Lead Senior Compliance Consultant Tina Mitchell – she’s here to help us think outside the box and really be prepared for the unexpected as we discuss some tips on how to prepare for a regulatory examination.


CCO Buzz: Hello and Welcome Back to the CCO Buzz Podcast! We’ve got a hot topic on our hands for today’s episode – its tips on how to prepare for a regulatory examination. Episode 40 features Core Compliance’s Lead Senior Compliance Consultant Tina Mitchell – she’s here to help us think outside the box and really be prepared for the unexpected. Her helpful tips are crucial to any firm’s examination prep process because she informs us of things even I didn’t think of. So, with that- take it away Tina!

Tina Mitchell: Okay, today I want to talk to you about getting prepared for a regulatory exam. This is crucial for firms, especially if you haven’t been through one before.

While you may feel that your compliance program is in good shape, you’ve done your annual review, you have customized policies and procedures, you’ve done testing, and everybody seems to be compliance minded.

These are all good things; but when is the last time you really reviewed your books and records to not only make sure they are being maintained, but to be gathered promptly and in the format requested by the regulator? This is actually where a lot of firms have problems during exams. I’m going to give you a couple of examples:

Regulators will ask for a copy of your “client list,” which sounds rather simple- right?

But, not so much. The SEC is going to ask for a client list – they want it provided in excel format and it must include 18 items, of course- as it is applicable – which go way beyond the name, account number and current balance for the account. You need to include things like –

  • The Custodian;
  • The Custodian’s account number;
  • Whether the account is a related person’s or a proprietary account;
  • Whether the custodian sends periodic statements to the client;
  • Whether or not the firm has custody of the account;
  • The value used to calculate the most recent fees;
  • Whether the account is combined with other accounts for fee level brake points; and
  • Whether or not the adviser has discretionary authority.

Regulators also ask for trade blotters. So, when the SEC requests that they request the blotter to have – besides the usual information on the trade, they want…

  • The time of the trade;
  • The name of the trader;
  • The strategy in which the trade was transacted;
  • The multiplier for the cash value;
  • the CRD number of the representative; and
  • In some cases, they want more.

I would bet that you probably don’t have readily available reports that can be run containing this information, which means you will need to pull the data from other sources to create. So, you have to be prepared ahead of time. We’ve had a lot of clients where this has taken a lot of time to gather because they hadn’t tried to determine where they would need to get it and what information they needed ahead of time.

Another step in preparing for a regulatory exam, is to prepare staff and senior managers. Because, you know, they want to interview the CCO and CEO of the firm, but in addition to that they’re going to want to interview other key role employees, such as Chief Compliance Officer, head trader, Operations Manager, Chief Financial Officer, or the equivalents.

And everybody gets a bit nervous when the SEC or state examiner comes in and when that happens, the normal response is to give or say more that what’s necessary. It’s not that you’re trying to hold back, but sometimes people like to fill-up the gap or silence.

So, performing mock exam interviews is actually very essential and it not only helps the employee understand how the process usually works, but it is going to help mitigate ahead of time any issues that may come up as a result of the mock interviews – that’s usually when you find out things you didn’t know before.  When the regulators do interview personnel the CCO should be in all such interviews, you need to clarify answers and take notes, if needed.

When the examiners come into your office, make sure you have a place for them to work. And usually you’re going to want to put a phone in there, so they can call the CCO if they have questions or especially if they want additional documents or copies of something. You don’t want to provide them with free access to a copy machine. And it is very important to keep copies of everything you give to the regulators during the full exam. So before, when you send them the documents – keep copies of what you send, keep copies of anything they request during the onsite visit, and after for supplemental request.

So, what I’ve discussed today- these are just a few steps that can be taken to prepare. But I want you to know that Core Compliance consultants we have deep experience in this area. We’ve all been through regulatory exams as in-house CCOs and we’re here to help. We help our clients with the preparation stage, we help behind the scenes during their exam and the onsite process, and we can help with responding to any kind of deficiency letters.

If you have any questions or need assistance – give us a call at (619) 278-0020. Thanks!

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 into next week’s episode of the CCO Buzz.




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