Nonetheless, investment advisors should prepare, even if they ultimately never hear from the agency, said Nancy Lininger, head of The Consortium, a compliance consultancy in Camarillo, California. The risk of not being prepared is too steep, Lininger said, especially given a new focus on robust enforcement by new SEC Chairwoman Mary Jo White.
Advisors can prep by directing their compliance officers to do these five things now:
1. Organize the basics: There are some records that the SEC typically wants to see, so don't put yourself in the position of scrambling for them at the last minute, says Korrine Kohm, a vice president with Ascendant Compliance Management in New York. For example, employees should complete a questionnaire every year about their compliance with the firm's policies and procedures. That may include answering questions about whether they've made political contributions, a violation that can prevent advisors from doing business with government clients for two years. Employee questionnaires are easy to catch up on if firms are behind, Kohm says.
2. Review your firm's public disclosure document: Businesses change, but many firms never update information about their business that they file with the SEC in the mandatory disclosure known as Form ADV, said Kohm. Big changes that advisors sometimes neglect to report are a spike in their assets under management or getting into an additional line of business, such as managing a new private fund, Kohm says.
3. Test yourself: Study lists of information and documents the SEC requested in examination letters it previously sent to other firms, says Salvatore Faia, president of Vigilant Compliance, LLC, a consultancy in Philadelphia. You can get them from compliance consultants and organizations such as the National Society of Compliance Professionals, who often keep redacted copies of letters as resources for clients and members. Then, try to gather the same information in a "mock process" at your own firm, says Faia.
4. Update and tailor your compliance manual: Many investment advisors, especially one or two person shops, buy pre-packaged compliance manuals that outline polices for everything from disclosures to archiving e-mails. But these manuals typically do not align with a firm's specific business model, says Brian Hamburger, president and chief executive of MarketCounsel, a compliance consultancy in Englewood, New Jersey.
For example, a firm that pursues a new type of business, such as advising an employer-sponsored retirement plan, should update the manual to include policies for complying with regulations in that practice area, Hamburger says.
5: Clear the compliance officer's plate: Chief compliance officers often have too many other jobs, said The Consortium's Lininger. For example, they many also be the firm's rainmaker and chief technology officer. Playing catch-up at a firm that has never been examined, especially this year, can be even more overwhelming to a compliance officer who has two other jobs, said Lininger. Make a business decision to shift the extraneous work to others or hire more help.