You open your inbox, ready to start your day, and what’s the first thing that greets you? A notice that you’re being examined from the SEC’s Division of Examinations (EXAMS), along with an initial request list for information. Time to panic? Of course not. Being examined by the SEC, and other regulatory authorities, is an inherent part of the investment advisory business. But the question remains, now that your firm has been selected for an examination, how should you respond to the initial EXAMS’ request letter?
For starters, it’s important to note that your response to the SEC starts long before you receive your letter from EXAMS. In fact, the work you do to adhere to your compliance program on a daily basis is the best preparation for any regulatory examination. That aside, let’s discuss the practicalities of the process and best practices for your response.
As Craig noted in our last post, an SEC examination can have a variety of different focuses. A commonality among all of these examinations is that they typically start with an initial document request list. In general, the EXAMS’ request letter will require your firm to provide a list of business records and perhaps narrative responses as to how your firm complies with regulations.
If you look back to our previous discussion on the Advisers Act Books and Records Rule, you’ll recall that the amount of records your firm is required to maintain is numerous and the retention period and location for these records can vary greatly. If you’re not sure if your firm is up-to-date on its records retention, now is the time review and come into compliance if needed before you receive a request letter.
Some examples of commonly requested materials you may be asked to provide include copies of your:
- compliance policies and procedures (see our post on building your compliance program);
- business continuity plan (see our post on business continuity plans);
- organizational chart;
- client agreement (see our post on client agreements); and
- trade blotter.
Organization is the key when preparing your response. When you receive the request letter and list of documents, review the list and identify potential issues. If you are uncertain about any requests, contact the assigned examiner on the request letter for clarification. You’ll likely have to provide many documents to EXAMS and will be required to do so promptly. To do this efficiently, identify all personnel in your firm who will be needed to provide documents or input on your response. Then, create a tracking document, assign the various items as applicable, compile and label the requested documents, and draft your response. When you begin to provide documents to the SEC as part of your response, be sure to track when and how you provide materials (i.e., via electric portal, postal mail, etc.). We also recommend you prepare and file a confidential treatment request in conjunction with your response to help keep it safe from requests made for public information under the Freedom of Information Act.
Responding to an SEC examination can be stressful, and we strongly recommend working with your legal or compliance professionals throughout the process. We’ll continue in our series on examinations next time, when Marc picks up our thread following the response to the initial examination request.