Long before your Firm is on the radar for an examination by the Securities and Exchange Commission or another regulator, the Firm should be preparing for the day they walk through the door. The minute your Firm opens it’s doors it guarantees a regulator will walk through them to examine the Firm’s policies and procedures. Here are some practical, everyday tips that will help make for a smooth examination.
1. Hot Issues of the Day. It is extremely important to keep up with the latest issues surrounding the financial industry and in particular the investment adviser world. Knowing the hot issues of the day can save the Firm time and energy prior to an examination.
For example, this year’s headlines include multiple ponzi schemes and frauds. These headlines should trigger an internal examination of your Firm’s financials and its custodian relationships. When a regulator walks through the doors it will conduct a thorough examination of the Firm’s financials to ensure the funds are in their proper place. It will also closely scrutinize where your clients’ money is being kept. In recent examinations the SEC has requested a list of account numbers from a Firm’s custodian and matched them with the records of the Firm lam bang dai hoc. Additionally, the SEC has followed client deposits to ensure the money is where the adviser says it is.
2. Updated Policies and Procedures. One would think this topic has been beaten into the heads of even the thickest skulls, but, it has not. At least weekly a story can be found where an adviser did not have policies and procedures for parts of their practice which resulted in a fine from the SEC. It is supremely important to have up-to-date policies and procedures that reflect the Firm’s actions. It is just as important to test those policies and procedures to ensure they work!
3. Review Past Examination Letters. Perhaps the most important action to take is correcting past deficiencies or taking corrective actions suggested by the regulators. Before conducting an adviser’s examination, a regulator will conduct due diligence on the Firm. The first piece of information reviewed is any past examinations by that regulator. This will result in the first questions of the new examination. Thus, it is vitally important to correct any previously noted deficiencies and just as important to ensure those defects do not or have not occurred again.
4. Document…Document…Document! The daily practice of documenting reviews, meetings and other actions provides a solid foundation for not just a compliance program but operations activities as well. For example, during an examination it is not uncommon for the examiners to dig into particular client accounts, such as all clients with over 50% of liquid net worth in one particular adviser fund.
The examiner may be hung up on the suitability of the situation. A well documented file with notes from the client meetings, an operations activity, can easily answer regulatory questions. However, this situation could play out negatively if client meeting notes are not required to be kept. It is much easier to show the examiner written notes than to try and explain a memory of a conversation that happened six months ago. In a Firm’s daily practices, documenting activities can save time and effort during the examination.
5. Open an Account with Your Firm. A simple and valuable way to test the effectiveness of a Firm’s policies and procedures is to open an account. This will allow you to receive everything a client receives, which is also an excellent internal control test of the Firm’s procedures. By opening an account you should receive: the annual offer for the Firm’s disclosure documents; the Firm’s privacy notice annually; regular statements; newsletters; invitations to meetings; and anything the Firm sends out to clients. If you don’t receive these documents or other information required by the policies and procedures manual, a deficiency exists; one the regulators will most likely find during an examination.
As you can see, the best way to prepare for a regulatory audit is through every day practices. These small steps can make a big difference in how your firm is perceived by an examiner. It is very powerful to be able to show the work your Firm has put in its policies and procedures as opposed to just speaking about it. By taking the time to do the little things now and not when the examiners show up, it will make your regulatory audit go a lot smoother.