Preparing for SEC Examinations: How Mock Exams Improve Exam Readiness

With examinations becoming an increasingly common tool used by the SEC to uncover deficiencies, ensuring your entire operation is prepared for when the Commission comes calling is time well spent.

If you’re a Chief Compliance Officer of a registered investment adviser, you’re likely familiar with the anxiety from the inevitable phone call announcing that your business will be examined.

These conversations tend to go something like this:

SEC officer: Hello, am I speaking to the CCO?

CCO (in a wary voice): Yes?

SEC officer: I’m calling from the Division of Examinations of the Securities and Exchange Commission.

CCO (after a pause): I see.

SEC officer: I wanted to let you know that we are conducting an examination of your firm. Do you have a moment to discuss the logistics?

From our team’s experience of having worked on the regulatory side, there tends to be another long pause before the CCO answers. The CCO would usually frantically try to email the company’s leadership to tell them. This shows that, if you’re not prepared, a call such as this can completely change the trajectory of a CCO’s entire week, if not month.

The CCO will likely have hundreds of thoughts running through their mind:

• When will they be here?
• What kind of information do they want?
• How far back do they need to look?
• My analyst just quit, how will I put everything together in time?
• What about my vacation next month, should I cancel it?
• Will the CEO be interviewed? And what if they say the wrong thing about that trade error?
• We have that new software we’re onboarding, have we documented this?
• Was my annual report on time last year?
• Did we fix everything?
• What if I missed something?

These calls can be anxiety-inducing for even the most experienced compliance staff member.

Each year, the SEC examines approximately 15% of all registered investment advisors. As Chair Gensler recently testified before the U.S. Senate, the number of investment advisers has increased by more than 20% in the past five years. During the same period, the Commission cited an increase of private funds of 50%. In response, the Chair requested that Congress approve an additional 83 positions to be added to the headcount of the Division of Examinations in 2024.

Chair Gensler’s message, that the Division of Examinations is the first line of defense for the investing public, is a warning to all CCOs to expect more frequent calls from Division staff. It’s not a question of if you will get the call; it’s when.

How CCOs Can Prepare for SEC Examinations

The key to preparing for an examination is simple: Practice. Practice. Practice.

Improving Exam Readiness Through Mock Examinations

A mock examination is the best tool to test your firm’s exam readiness and overall resiliency of your compliance program. You already review your policies annually and conduct your testing on a monthly or quarterly basis. A mock exam goes beyond those processes to ensure your experience is as close to a real examination as possible.

Managing Document Production During an SEC Examination

If you haven’t tested your exam readiness in response to an 80+ item request list, a mock exam will help you determine which items will require more time to produce. An experienced mock examiner can give you useful tips for producing this information and how to request additional time when needed.

Understanding the Scope and Depth of SEC Examinations

CCOs who have never been examined are often surprised at how granular a level the Commission conducts forensic testing. The Commission takes a risk-based approach. It’s worth noting that while your annual financial statement audit has a materiality threshold of approximately 2%, there’s no materiality threshold in the Advisers Act.

Using Mock Examinations to Prepare for Staff Interviews

If your CEO or portfolio managers have never been interviewed, a mock exam will provide you with useful feedback that you can put into practice when the Commission comes calling.

How Mock Exam Findings Affect SEC Deficiency Letters

CCOs are often concerned that findings in a mock exam report will be handed over to the Commission during an actual examination. However, the Commission encourages obtaining external reviews and mock examinations as a matter of public policy. As a result, the SEC is unlikely to include mock exam findings in a deficiency letter if those mock exam findings are adequately addressed by the firm.

In fact, findings in a mock exam can strengthen your compliance program and demonstrate your commitment to a strong compliance culture. This will speak volumes to examiners who are looking to poke holes in your compliance program.

How Ocorian Helps Firms Prepare for SEC Examinations

Our tailored mock exams assess both the investment and operational aspects of your business, including controls and adherence to compliance policies and procedures.

This allows everyone to know what to expect, be prepared for interviews, and confidently navigate document production and forensic testing.

Author: Tanner Kreger