I wrote about what to expect and how to prepare for an SEC exam two years ago, but the recently-released SEC Exam Handbook is a primary source that succinctly summarizes the current exam roadmap.
What follows are a few interesting tidbits that I didn’t highlight in my prior article.
- The reason for an exam is non-public; however, exam selection factors can include:
- prior examination history
- supervisory concerns, such as disciplinary history of associated individuals or affiliates
- tips, complaints, or referrals involving the registrant
- the length of time since registration or the last examination
- the registrant’s client base
- products and services the registrant offers and business activities that may create conflicts of interest
- material changes in the registrant’s leadership or key personnel
- indications that the registrant may be vulnerable to financial or market stresses
- reporting by news and media that may involve or impact the registrant
- information filed by the registrant with the SEC or with a self-regulatory organization
- whether the registrant holds or has access to client and investor assets or customer cash and securities (i.e., custody)
- The SEC expects that most records should be produced within 24 hours. In practice, the staff usually provides two weeks after the initial information request.
- For interviews conducted by videoconference, participants are encouraged to use their cameras and screen-sharing functions. Exam staff does not record or transcribe meetings and instructs participants not to do so either. Exam staff does not consent to the use of recording, transcription, super intelligence notetaking tools, or other similar technologies.
Sidebar: given the SEC’s embrace of AI or “super intelligence,” I’m curious if this stance will change. - Exam staff cannot provide an estimate of the overall duration of a particular exam. Registrants should expect to receive a disposition letter within 180 days of either the completion of the on-site portion of the examination, if applicable, or the receipt of all requested records, whichever occurs later.
Sidebar: given the Exam staff’s conceptual right to issue multiple supplemental requests for records during the course of an exam, the 180 day disposition letter receipt window doesn’t carry much weight, in my opinion. - Exam staff deficiency letters purposely do not mandate a particular corrective action beyond complying with applicable law. Registrants are expected to formulate their own corrective actions and describe them in response to a deficiency letter.
- A registrant’s response to a deficiency letter is expected within 30 days. If Exam staff has comments about the registrant’s response to a deficiency letter, Exam staff will *strive* to provide them within 60 days thereafter. Generally, Exam staff does not comment on the adequacy of corrective actions proposed by the registrant.