How to Prepare for an SEC or FINRA Regulatory Examination

The words “SEC/FINRA exam” can trigger the jitters in most CCOs across the industry. They’re out to get me! Will they shut down my firm? Will I still have a job when they finish? Perhaps these thoughts and many others have crossed your mind when you got the dreaded phone call from your local SEC/FINRA office notifying you that you’ve been “selected” to go through an examination by their Staff.

Are you ready? How to Prepare for an SEC or FINRA Regulatory ExaminationAs a former CCO that has been through plenty of examinations by various regulatory bodies, I have one word of advice – relax.

As long as you aren’t running a rogue operation like Bernie Madoff, creating client statements in the basement of your office building or having a “shredding party” hosted by Oliver North, it is likely that you’ll survive the examination.

Don’t get me wrong, the regulatory exam process should be taken very seriously but it is something that you should have been anticipating and preparing for on an ongoing basis. The SEC, FINRA, etc. (arguably) have one goal in mind – investor protection.

I do have a bit of bad news though. If you’ve been selected for an examination and you have NOT been keeping up with your compliance management processes and oversight, there’s really not much you can do to prepare. There simply isn’t enough lead time in the examination process to fix deficiencies and close gaps; and if you didn’t do something when you were supposed to, there is no ethical way to go back and make up for it.

What you CAN do is familiarize yourself with the examination process so you’ll know what to expect, especially if this is the first time you’re going through one. Download our free CCO’s Guide to Surviving a Regulatory Examination for a thorough run down of the process.

 The Best Time to Prepare for an Examination

You probably already figure this out by now but the best time to prepare for an SEC or FINRA examination is BEFORE you get selected for one.

There are 4 main areas to focus on in maintaining a sound compliance program that will withstand an examination:

  1. Written Supervisory Procedures (WSPs)
    You must maintain current and updated documentation of your compliance policies and procedures. A thorough and well-written compliance manual is the foundation of any good compliance program and it’s one of the most critical pieces of documentation that regulatory examiners will ask for. Make sure you have one and that you review it periodically (at least once a year) to keep it current. One of the most common issues we find is compliance manuals that have not adjusted to changes in the business. Don’t let your WSP fall out of alignment with your business.

  2. Testing
    If documenting your policies is the most important first step, the next fundamental component that goes hand in hand with that is demonstrating that your firm and staff adhere to those policies. This is done through testing. If you can’t prove what you say you do, it’s no different than not doing it in the first place. To be fully prepared for an eventual exam, you have to keep evidence of regular testing. And that testing has to either demonstrate adherence or show how a discrepancy was discovered that you then fixed!

  3. Monitoring Examination Priorities
    Both the SEC and FINRA provide annual guidance on their examination priorities for each year as well as alerts on the common findings they discover. These provide an excellent way to know the areas where examiners may be digging a little deeper. If you could get a heads up on the likely topics for a test, why wouldn’t you take advantage of that?

  4. Communication
    Compliance shouldn’t be a once a year or periodic activity. The best firms make compliance part of the company’s culture. There is no better way to foster this type of environment than to regularly communicate with firm staff on compliance expectations, requirements, priorities and activities. Doing so will pay dividends when it comes time to demonstrate to examiners that the firm and all of it’s employees take compliance seriously.

For more tips and guidance on how to prepare along these four areas, download our free CCO’s Guide to Surviving a Regulatory Examination.

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