Operating an investment advisory firm involves navigating a complex regulatory environment. While you aim to serve your client’s best interests, you must also ensure compliance with securities laws and regulations.
One of the most daunting experiences for any RIA is a regulatory audit. Audits conducted by the SEC’s Office of Compliance Inspections and Examinations can create stress and uncertainty. However, with the proper preparation, you can approach an SEC audit with confidence.
In this article, we’ll walk through what triggers an SEC audit, what to expect during the process, and, most importantly—how to prepare your firm for a smooth experience.
Why Do SEC Audits Occur?
The Securities and Exchange Commission regularly conducts audits of public companies as part of its mission to protect investors. Audits may occur for a variety of reasons:
- Routine Audits – The SEC has a schedule to audit companies on a periodic cycle. Think of this as a regular check-up.
- Risk-Based Audits – The SEC also selects companies to audit based on certain risk factors. For example, companies in high-risk industries or those undergoing major changes may receive greater scrutiny.
- For Cause Audits – Tips or complaints about potential wrongdoing can also trigger an SEC audit. Here, the examination aims to investigate the specific issues raised.
Regardless of the reason, rest assured the audit aims to verify your company complies with regulations and provides accurate information to investors and the public.
Areas the SEC Emphasizes
When the audit notice arrives, it’s helpful to understand which aspects of your business the SEC commonly emphasizes to perform your own risk assessment.
Here’s what they often check for:
- Portfolio Management: The SEC verifies your actual investment activities align with disclosures made to clients and regulatory bodies. This includes checking the suitability of investments chosen for client objectives and risk tolerance.
- Performance Advertising: Any performance claims in your marketing are scrutinized to ensure they comply with standards and provide accurate representations.
- Custody Issues: If your firm has custody of client assets in any way, custody procedures and safeguarding of funds come under the microscope.
- Conflicts of Interest: Identifying and disclosing all conflicts is obligatory. The SEC checks you place client interests first at all times.
- Books and Records: Your recordkeeping and documentation processes fall under examination to confirm transactions are tracked properly.
While this list is not exhaustive, keeping these priority areas in mind while preparing can guide your efforts productively.
The Step-by-Step Process of an SEC Audit
Now that you know why SEC exams occur and what they entail, let’s walk through the typical stages of an inspection from start to finish:
- Notification – You will receive a notification letter from the SEC to inform you of an upcoming routine audit. This gives you time to begin gathering information you know auditors will likely request when they arrive.
- Information Gathering – During the initial on-site work, examiners will interview key personnel at your firm and formally request access to an extensive list of documents. Responding promptly assists the inspection.
- Field Work – The in-depth fieldwork stage involves auditors analyzing the information provided, cross-checking data, reviewing accounts, assessing compliance, and more. You can expect frequent follow-up requests during this time.
- Exit Meeting – Before leaving your offices, SEC staff will hold an exit meeting to summarize preliminary observations from the inspection. However, their findings remain subject to internal review and may change.
- Draft Report – Within 60 days after finishing fieldwork, your firm will receive a draft letter with evaluations of apparent deficiencies or regulatory weaknesses found during the audit.
- Company Response – You have 30 days after receiving the draft document to address any areas of concern raised and present explanatory information. Providing evidence to resolve open items is wise at this stage.
- Final Report – The SEC then generates a final written report on examination findings. This document signals the end of the official audit.
Of course, hearing that your firm faces weeks of intense scrutiny is daunting, no matter your preparation level. However, understanding how the process flows can give you a sense of control rather than feeling lost in ambiguity.
How to Prepare for a Smooth Audit Experience
The best defense is a strong offense when it comes to SEC audits. By taking proactive steps to prepare, you can help facilitate an efficient process:
- Implement a robust compliance program – Review your policies and procedures to ensure alignment with current regulations. Update your compliance manual regularly.
- Get your house in order – Gather and organize requested documents so they are inspection-ready.
- Prepare personnel – Conduct mock interviews to get key staff ready for questioning.
- Know the rules – Continuously educate yourself on evolving SEC regulations.
- Meet deadlines – Compile and submit requested information on time.
What to Expect During the Actual Audit
During the on-site audit, you can expect SEC examiners to focus on:
- Evaluating your financial statements
- Assessing the adequacy of internal controls
- Testing for accuracy and completeness in reporting
- Interviewing key personnel
- Inspecting supporting documentation
By understanding common areas of scrutiny, you can double-check your readiness in these domains.
Mistakes to Avoid
Some common missteps that make the audit process more difficult include:
- Insufficient documentation
- Weak internal controls
- Lack of cooperation
- Missed deadlines
Avoid these pitfalls by working diligently to prepare and engaging experienced counsel to guide you through the process.
Don’t Go It Alone – Seek Expert Compliance Guidance
Tackling SEC audits and regulations is no small task. My RIA Lawyer’s SEC compliance lawyers have the experience to guide your firm through the audit process confidently.
Visit their team online today https://www.myrialawyer.com/ to learn how they can help ensure your next SEC audit goes smoothly.
With the right preparation and support, your firm can leverage audits to demonstrate the strength of your compliance program.
