The SEC's Boston Regional Office is conducting unannounced examinations of investment advisers.
As noted in the August 14th issue of ACA Insight, the associate director for examinations at the SEC's Boston Regional Office, Kevin Kelcourse, recently confirmed that the Boston office has been making unannounced exam visits to registered advisers in the region.1 According to him, less than 20 unannounced exams have been conducted by his office in the last year or so. Kelcourse clarified, importantly, that no particular type of advisory firm is being targeted as part of this surprise exam initiative.
As for why the SEC's Boston office has decided to employ the element of surprise, the associate director explained that some advisory firms, knowing they are about to be examined, quickly take steps to enhance their compliance programs before the examiners arrive onsite. An advisory firm that gets an unexpected knock on the door from the SEC would obviously not have this last-minute opportunity to clean things up.
Section 204(a) of the Investment Advisers Act grants the SEC authority to conduct examinations of all records maintained by investment advisers at any time as the SEC deems necessary or appropriate in the public interest or for investor protection. The SEC's Office of Compliance Inspections and Examinations (OCIE) conducts the SEC’s National Exam Program.
OCIE has historically relied on this general authority to conduct both announced and unannounced exams of registered advisers. While the unannounced visit once was an important tool in OCIE's toolbox, the practice of showing up without notice has generally become less popular in recent years.
The typical exam process in recent years has involved the SEC sending a letter to an advisory firm that: (1) notifies the firm that OCIE will be commencing an onsite exam on a specified date during the upcoming weeks; and (2) requests certain firm records that SEC examiners want to review. To be sure, OCIE has continued to perform unannounced "cause examinations" when it believes there is good reason to suspect that malfeasance or another significant problem is occurring at an advisory firm. But today, this type of unannounced exam is the exception rather than the norm. As such, the Boston office's revival of surprise exams is a noteworthy development.
With regard to how the SEC surprise exam process works, Kelcourse indicated that examiners conducting an unannounced exam typically request a meeting with the firm's chief compliance officer and provide him or her with a document request list at this meeting. While the adviser being examined is not generally expected to produce all the requested documents immediately, the examiners may still request to review certain documents such as a general ledger during this meeting. Interestingly, there are not always document request lists associated with these surprise examinations.
Advisers across the country are left wondering: will other SEC regional offices follow the lead of the Boston office and start conducting unannounced visits to advisers in their respective jurisdictions? At the moment, this remains an open question. We will learn in the coming months whether other regional offices follow suit and decide to employ the element of surprise. In either event, however, the recent revival of surprise exams is a further reminder that advisory firms should make sure they are adequately prepared for a potential visit from the SEC.
How ACA Can Help
ACA Compliance Group offers SEC Mock Audit Reviews to prepare firms for an actual SEC regulatory inspection. If you have questions about the SEC’s recent surprise examinations or would like more information about our Mock Audit Services, please contact Jack Rader, Kent Wegrzyn, or your regular ACA consultant.