The U.S. Securities and Exchange Commission (SEC) this year is conducting more one-day examinations of fledgling registered investment advisors to assess their risk areas and compliance policies. An SEC spokesman said the agency is expanding its auditing efforts nationally on the heels of a pilot program it launched last year in its Atlanta and Ft. Worth, Texas, regional offices.

   According to advisors who've been examined, the SEC told them the agency is stepping up its examinations to ensure that the ever-growing number of new RIA practices are starting off on the right foot.

   As part of the audit process, the SEC requests in advance to see a variety of key documents such as Form ADV Part II and schedules; organizational charts (both internal and of all affiliated entities); compliance policies and procedures; client lists including calculations of assets under management; and financial statements. During the audit, the SEC examiner expects to meet with somebody from senior management or the chief compliance officer to discuss the firm's operations.

   Topics of discussion can range from disclosure policies and brokerage arrangements to marketing information and whether portfolio management decisions jibe with client mandates, says Jarrod James, senior compliance consultant at RIA Compliance Consultants in Omaha, Neb. He says the SEC seems particularly interested in firms that manage hedge funds and other pooled accounts.

   The SEC earlier this year paid a visit to Nashville financial planner David Goldberg. "It was like having big brother talking to you about your business," says Goldberg, a former independent advisor with Raymond James who in April 2007 started his own firm, Snow Creek Wealth Management. He got a fax from the SEC in early January that informed him the agency planned to examine his practice the following week and instructed him to make certain materials available.

   During the audit, Goldberg took the examiner into his conference room and started the process by giving her an overview of what the firm does and how it does it. "It's the same overview I give clients about our business," he says.

   The SEC staffer came on a Monday, and Goldberg said he spent much of the prior week preparing for the meeting. The examiner looked over numerous documents and asked a lot of questions over the course of the six-hour audit. Goldberg says things went smoothly for the most part, although the examiner "had a couple of picky things about the ADV."

   Ten weeks later, the SEC sent a follow-up letter that gave its seal of approval to his firm's practices.

   "I'd rather have this done toward the beginning [of being in business] than wait five years to find out things weren't done right," Goldberg says.

   Jim Flinchum, managing principal at Bay Capital Advisors in Virginia Beach, Va., got his audit notice from the SEC via email in April. Flinchum, who previously was at Bank of America before he opened his own practice in July 2006, had interviewed a number of compliance companies to do an audit for his firm but the least expensive outfit he found charged $15,000. And then out of the blue the SEC told him they were coming.

   "We went through a deep panic," Flinchum says. He worked with RIA Compliance Consultants to prep for the audit, and they helped him organize his firm's pertinent information into a Power Point presentation. Flinchum says the examiner spent a lot of time on two particular areas: making sure his compliance manual was customized to fit his firm's practice; and how he supervised the two independent advisor representatives on his four-person staff.

   Flinchum has yet to get his follow-up letter from the SEC regarding whether or not his firm had any deficiencies, but he's glad he went through the process. "I'm grateful they came because they saved me $15,000," he says.