Increase in SEC Examinations: Four Strategies for a More Seamless Experience
Investment managers bracing for a Securities and Exchange Commission (SEC) exam should focus on thorough document management, robust data protocols, and well-organized day-one presentations to demonstrate compliance readiness and operational strength.
The SEC, approaching the end of its fiscal year this month, expects errors or oversights and requires investment management firms to be prepared to discuss findings without fear or negativity. Panicking when the SEC makes an unexpected request is natural, but it should be addressed if it is related to an area already in the process of being rectified and shows no apparent conflicts of interest with the firm's underlying mandate.
Document Management
Maintaining a comprehensive SEC compliance exam checklist is essential to ensure all required documents and policies are current and accessible, facilitating quick responses during surprise exams. Conducting internal audits and annual compliance reviews aligned with SEC priorities, especially under Rule 206(4)-7, verifies written policies and procedures are effective and updated regularly. Preparing clear documentation covering conflicts of interest, fiduciary duties, and compliance programs, including procedures for handling dual registrants and independent contractors, is also crucial.
Data Protocols
Implementing strong data governance and vendor due diligence processes helps manage third-party risks and safeguard sensitive information effectively. Ensuring data protocols support transparency and easy retrieval of transactional and client-related information relevant to SEC inquiries, emphasising controls over AI and emerging compliance topics, is essential. Training staff on privacy and cybersecurity controls consistent with Regulation SP and current SEC focus areas is equally important.
Day-One Presentations
Preparing a concise and structured presentation summarising the firm’s compliance framework, recent internal audit results, key policies, and any changes implemented in response to regulatory updates, displays proactive oversight. Facilitating open and constructive dialogue with the SEC examiners by anticipating their areas of focus based on the SEC’s published examination priorities is also key. Designating a knowledgeable chief compliance officer (CCO) or senior staff member to lead interactions demonstrates the firm’s authority and autonomy in compliance matters.
For private equity managers, the SEC may scrutinise how fees and expenses are allocated. Managers of hedge funds should establish appropriate data control protocols to ensure ongoing compliance with the Advisers Act. The SEC exam staff takes routine examinations as an opportunity to learn about investment strategies they may not have had exposure to, such as crypto and digital asset fund managers.
Adopting a proactive mindset centered on thorough preparation, regular internal assessments, and clear, transparent communication will position investment managers strongly during SEC exams and help transform examinations into opportunities for operational improvements and investor confidence.
Not having or being unable to access the right documentation is a serious issue. Having solid documentation of compliance with applicable SEC Rules and Regulations is critically important. Reproduction, storage, or transmission of the publication requires written permission from the publisher. The article is a guest article for Hedge Funds under Hedge Funds Guest Articles. For the firm being examined, presenting an overview of the firm to the SEC Staff on the first day of the exam is essential.
The views expressed in the article are those of the author and do not necessarily reflect the views of AlphaWeek or its publisher, The Sortino Group. Fizza Khan, the Founder and CEO at Silver Regulatory Associates, offers valuable insights in this article.
In the context of SEC exams, demonstrating a robust document management system is vital for investment managers, as it allows for quick access to current and accurate documents, and includes well-documented policies addressing conflicts of interest, fiduciary duties, and compliance programs.
Preparing a comprehensive day-one presentation outlining the firm's compliance framework, recent audit results, key policies, and regulatory updates showcases proactive oversight and sets the stage for open and constructive dialogue with SEC examiners.
