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SEC Examinations and Enforcement of Investment Advisers

March 21, 2024

SEC Examinations of Investment Advisers: What You Need to Know

So, you’re an investment adviser. You’ve registered with the SEC, set up your compliance program, and are diligently following all the rules and regulations. But, take a deep breath, because the SEC examination process is no walk in the park. These exams can be intense, time-consuming, and leave you feeling like you’ve been put through the wringer.Don’t worry though, we’ve got your back. In this comprehensive guide, we’ll break down everything you need to know about SEC examinations of investment advisers. From understanding the examination process to preparing for the big day, we’ll cover it all in a way that’s easy to understand (no legal jargon overload, we promise).

What is an SEC Examination?

Let’s start with the basics. An SEC examination is essentially an inspection or audit conducted by the Securities and Exchange Commission (SEC) to ensure that investment advisers are complying with federal securities laws and regulations.These examinations can be routine (part of the SEC’s normal oversight process) or caused by specific concerns (like investor complaints or red flags in your filings). Either way, the goal is to protect investors by making sure advisers are operating in a fair and transparent manner.During an examination, the SEC staff will review various aspects of your business, including:

  • Compliance program and policies
  • Marketing materials and advertisements
  • Portfolio management processes
  • Trading practices
  • Custody of client assets
  • Fees and expenses charged to clients
  • Disclosures made to clients
  • Employee personal trading
  • Cybersecurity measures

Basically, they‘ll be digging into every nook and cranny of your operations to ensure you’re following the rules and treating clients fairly. It’s like having a really strict parent go through your room with a fine-toothed comb.

The Examination Process

So, what exactly happens during an SEC examination? Here’s a general overview of the process:

1. You Get “The Call”

It usually starts with a phone call or email from the SEC staff, informing you that your firm has been selected for an examination. At this point, they’ll likely request an initial set of documents and information to get the ball rolling.

2. The Document Request

Next up is the dreaded document request list. This is essentially a laundry list of materials the SEC staff wants to review, including things like:

  • Compliance manuals and code of ethics
  • Client agreements and disclosures
  • Marketing materials
  • Trade blotters and portfolio holdings
  • Employee personal trading records
  • Custody records
  • Cybersecurity policies and procedures

It can be a daunting task to gather all of these documents, especially if your recordkeeping isn‘t up to par. But, it’s crucial to provide the SEC with everything they’ve requested, as failing to do so can raise red flags and potentially lead to more scrutiny.

Christine Twomey
Christine Twomey
2024-03-21
Just had my Divorce case settled 2 months ago after having a horrible experience with another firm. I couldn’t be happier with Claire Banks and Elizabeth Garvey with their outstanding professionalism in doing so with Spodek Law Group. Any time I needed questions answered they were always prompt in doing so with all my uncertainties after 30 yrs of marriage.I feel from the bottom of my heart you will NOT be disappointed with either one. Thanks a million.
Brendan huisman
Brendan huisman
2024-03-18
Alex Zhik contacted me almost immediately when I reached out to Spodek for a consultation and was able to effectively communicate the path forward/consequences of my legal issue. I immediately agreed to hire Alex for his services and did not regret my choice. He was able to cover my case in court (with 1 day notice) and not only was he able to push my case down, he carefully negotiated a dismissal of the charge altogether. I highly recommend Spodek, and more specifically, Alex Zhik for all of your legal issues. Thanks guys!
Guerline Menard
Guerline Menard
2024-03-18
Thanks again Spodek law firm, particularly Esq Claire Banks who stood right there with us up to the finish line. Attached photos taken right outside of the court building and the smile on our faces represented victory, a breath of fresh air and satisfaction. We are very happy that this is over and we can move on with our lives. Thanks Spodek law 🙏🏼🙏🏼🙏🏼🙏🏼🙌🏼❤️
Keisha Parris
Keisha Parris
2024-03-15
Believe every single review here about Alex Z!! From our initial consultation, it was evident that Alex possessed a profound understanding of criminal law and a fierce dedication to his clients rights. Throughout the entirety of my case, Alex exhibited unparalleled professionalism and unwavering commitment. What sets Alex apart is not only his legal expertise but also his genuine compassion for his clients. He took the time to thoroughly explain my case, alleviating any concerns I had along the way. His exact words were “I’m not worried about it”. His unwavering support and guidance were invaluable throughout the entire process. I am immensely grateful for Alex's exceptional legal representation and wholeheartedly recommend his services to anyone in need of a skilled criminal defense attorney. Alex Z is not just a lawyer; he is a beacon of hope for those navigating the complexities of the legal system. If you find yourself in need of a dedicated and competent legal advocate, look no further than Alex Z.
Taïko Beauty
Taïko Beauty
2024-03-15
I don’t know where to start, I can write a novel about this firm, but one thing I will say is that having my best interest was their main priority since the beginning of my case which was back in Winter 2019. Miss Claire Banks, one of the best Attorneys in the firm represented me very well and was very professional, respectful, and truthful. Not once did she leave me in the dark, in fact she presented all options and routes that could possibly be considered for my case and she reinsured me that no matter what I decided to do, her and the team will have my back and that’s exactly what happened. Not only will I be liberated from this case, also, I will enjoy my freedom and continue to be a mother to my first born son and will have no restrictions with accomplishing my goals in life. Now that’s what I call victory!! I thank the Lord, My mother, Claire, and the Spodek team for standing by me and fighting with me. Words can’t describe how grateful I am to have the opportunity to work with this team. I’m very satisfied, very pleased with their performance, their hard work, and their diligence. Thank you team!
Anthony Williams
Anthony Williams
2024-03-12
Hey, how you guys doing? Good afternoon my name is Anthony Williams I just want to give a great shout out to the team of. Spodek law group. It is such a honor to use them and to use their assistance through this whole case from start to finish. They did everything that they said they was gonna do and if it ever comes down to it, if I ever have to use them again, hands-down they will be the first law office at the top of my list, thank you guys so much. It was a pleasure having you guys by my side so if you guys ever need them, do not hesitate to pick up the phone and give them a call.
Loveth Okpedo
Loveth Okpedo
2024-03-12
Very professional, very transparent, over all a great experience
Bee L
Bee L
2024-02-28
Amazing experience with Spodek! Very professional lawyers who take your case seriously. They treated me with respect, were always available, and answered any and all questions. They were able to help me very successfully and removed a huge stress. Highly recommend.
divesh patel
divesh patel
2024-02-24
I can't recommend Alex Zhik and Spodek Law Firm highly enough for their exceptional legal representation and personal mentorship. From the moment I engaged their services in October 2022, Alex took the time to understand my case thoroughly and provided guidance every step of the way. Alex's dedication to my case went above and beyond my expectations. His expertise, attention to detail, and commitment to achieving the best possible outcome were evident throughout the entire process. He took the time to mentor me, ensuring I understood the legal complexities involved to make informed decisions. Alex is the kind of guy you would want to have a beer with and has made a meaningful impact on me. I also want to acknowledge Todd Spodek, the leader of the firm, who played a crucial role in my case. His leadership and support bolstered the efforts of Alex, and his involvement highlighted the firm's commitment to excellence. Thanks to Alex Zhik and Todd Spodek, I achieved the outcome I desired, and I am incredibly grateful for their professionalism, expertise, and genuine care. If you're in need of legal representation, look no further than this outstanding team.

3. The On-Site Visit

Once you’ve provided the requested documents, the SEC staff will likely schedule an on-site visit to your offices. This is where the real fun begins.During the on-site visit, the examination team will conduct interviews with key personnel (like your chief compliance officer, portfolio managers, and traders), review additional documents and records, and observe your operations firsthand.They’ll be looking for any potential issues or areas of concern, such as:

  • Inadequate compliance policies and procedures
  • Failure to disclose conflicts of interest
  • Improper allocation of investment opportunities
  • Inaccurate performance advertising
  • Custody rule violations
  • Inadequate cybersecurity measures

It’s like having a team of auditors go through your business with a fine-toothed comb, leaving no stone unturned.

4. The Deficiency Letter

After the on-site visit, the SEC staff will review all of the information they’ve gathered and determine if there are any deficiencies or areas of non-compliance. If so, they’ll issue a deficiency letter outlining their findings and any required corrective actions.This letter can range from a slap on the wrist for minor issues to a full-blown enforcement action for more serious violations. Either way, it‘s crucial to take the deficiency letter seriously and address any identified issues promptly.

5. The Follow-Up

Depending on the severity of the deficiencies, the SEC staff may conduct follow-up visits or request additional information to ensure that you‘ve implemented the necessary corrective actions.They’ll want to see evidence that you’ve addressed the issues and made any required changes to your policies, procedures, and operations. It’s like having a teacher check your homework to make sure you’ve learned your lesson.

Preparing for an SEC Examination

Now that you understand the examination process, let’s talk about how to prepare for it. Being proactive and taking the right steps can go a long way in ensuring a smoother, less stressful examination experience.

1. Conduct a Mock Examination

One of the best ways to prepare for an SEC examination is to conduct a mock examination of your own. This involves having an independent third party (like a compliance consultant or law firm) review your operations, policies, and procedures as if they were the SEC staff.A mock examination can help identify any potential issues or areas of non-compliance before the real thing, giving you the opportunity to address them proactively. It‘s like having a dress rehearsal before the big show.

2. Review and Update Your Compliance Program

Your compliance program is the backbone of your operations and will be a major focus during an SEC examination. Take the time to review and update your compliance policies and procedures to ensure they’re up-to-date and accurately reflect your current practices.This includes things like:

  • Code of ethics
  • Personal trading policies
  • Custody procedures
  • Advertising and marketing guidelines
  • Cybersecurity measures
  • Business continuity plans

Having a robust, well-documented compliance program can go a long way in demonstrating your commitment to following the rules and protecting your clients.

3. Train Your Employees

Your employees are the front line of your operations, and their actions (or inactions) can have a significant impact on the outcome of an SEC examination. Make sure they‘re properly trained on your compliance policies and procedures, as well as how to handle interactions with the SEC staff.Regular training sessions can help reinforce the importance of compliance and ensure that everyone is on the same page when it comes to following the rules.

4. Organize Your Records

During an SEC examination, you’ll be required to provide a wide range of documents and records. Having a well-organized recordkeeping system can make this process much smoother and less stressful.Implement processes for maintaining and organizing things like:

  • Client agreements and disclosures
  • Trade blotters and portfolio holdings
  • Employee personal trading records
  • Custody records
  • Compliance logs and testing results

Being able to quickly and easily retrieve requested documents can demonstrate your commitment to compliance and make a positive impression on the SEC staff.

5. Conduct Regular Testing and Reviews

Regularly testing and reviewing your compliance program can help identify and address any potential issues before they become bigger problems. This can include things like:

  • Annual compliance program reviews
  • Periodic testing of key controls and procedures
  • Reviewing marketing materials and advertisements
  • Monitoring employee personal trading
  • Conducting cybersecurity risk assessments

By proactively identifying and addressing potential issues, you can demonstrate to the SEC staff that you take compliance seriously and are committed to continuous improvement.

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Todd Spodek

Founding Partner

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RALPH P. FRANCHO, JR

Associate

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JEREMY FEIGENBAUM

Associate Attorney

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ELIZABETH GARVEY

Associate

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CLAIRE BANKS

Associate

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RAJESH BARUA

Of-Counsel

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CHAD LEWIN

Of-Counsel

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