5 questions advisers should ask to make SEC audits as seamless as possible

By using a proactive approach, firms not only save time and minimize risk, but they also instill confidence into their team from the top down.

You would be hard-pressed to find an adviser who joined this profession for the thrill of the regulatory audits. If your RIA firm has ever undergone an audit, which the SEC is likely to do about once every eight years, you know the process can be daunting and even stress-inducing. However, if you know what to expect, the audit can actually be a positive experience which provides your team with an opportunity to improve and uncover new opportunities.

According to a 2022 Securities and Exchange Commission report, the percentage of audited RIA firms grew from 10% in 2015 to 16% in 2021. Rest assured; this increase in SEC audits is not reflective of the agency’s yearning for more “gotcha” moments. The main objectives are much more straightforward:
1. To protect retail investors.
2. To detect and prevent violations of securities laws and rules.
3. To ensure RIA firms establish and maintain internal compliance programs.

As a compliance consultant to more than 2,200 RIA firms, we receive many questions from advisers asking how to prepare and what to expect so they can make the process as seamless as possible. The most common questions include:

WHAT IS THE BEST WAY TO PREPARE OUR FIRM’S DOCUMENTS?

If you attempt to prepare for an audit after you receive the notice from the SEC, you are far too late. As a general rule of thumb, everything — from the firm’s organization chart to detailed client information, employee trade records, and advertising materials — should be gathered and properly labeled in one place. Then, after you have received the notice, the leadership team should prepare the overview presentation, which gives your company an opportunity to explain what you do and how you do it. The response to the initial document request is due roughly seven to 14 days after the date of the request letter.

WHAT SHOULD WE EXPECT DURING THE INITIAL INTERVIEW?

Your firm’s senior management, chief compliance officer, and compliance staff should be available and prepared to answer detailed questions during the initial interview. This is an opportunity to establish a game plan, such as the length of the examiner’s stay and what the process will be like. Remember, do not hesitate to ask any questions you may have about the process during this time.

HOW LONG SHOULD AN INTERACTION TAKE?

A typical on-site interaction could take anywhere from one to five days, whereas a virtual interaction is usually two to four hours. During an on-site interaction, you should elect a point-person (usually the chief compliance officer) to give an office tour and alert your entire staff with the expectation they may be interviewed.

WHAT IF WE’RE NOT OFFERED AN EXIT INTERVIEW?

An exit interview is a prime opportunity to identify and discuss preliminary deficiencies. If an exit interview is not offered, you should ask for one to get a better understanding of the timeline and next steps.

WHAT HAPPENS IF WE GET A DEFICIENCY LETTER?

It’s important to know around 70% to 80% of reviews result in a deficiency letter of some sort — so if you receive one, take it as an opportunity to improve. The SEC has up to six months to send your firm this letter with a detailed account of which deficiencies need to be resolved and how long you have to do so. Your team will typically be required to respond within 30 days.

We know when firms face the audit experience head-on using a proactive approach, they not only save time and minimize risk, but they also instill confidence into their team from the top, down. This approach, combined with having the right technology tools, will continue to set the leading RIAs apart from the rest.

Jason Vinsonhaler is the director of compliance for RIA in a Box, the leading compliance solution for investment advisers.