Blog > Compliance > How to Reduce Your Firm’s Risk in an SEC Examination

How to Reduce Your Firm’s Risk in an SEC Examination

The SEC’s Office of Compliance Inspections and Exams recent report outlining their 2019 examination priorities has some interesting statistics and insights for financial advisors to consider.

Chief among them: A few years ago, the examination rate of RIA firms was under 10%, and now it’s closer to 20%.

So with your chance of being audited going up by double in about five years, you have to understand how to limit your firm’s risk. The risk a firm poses to the investing public is one of the primary factors the OCIE uses to determine who to evaluate first, and how often.

In our new whitepaper on the OCIE’s 2019 exam priorities, we go deep into what firms everywhere should be concerned about and how to make positive changes before an examination occurs.

In today’s blog, we’ll carve out just a small piece of information from that larger report.

How to Reduce Your Firm’s Risk in an SEC Examination

There are four keys you can keep in mind to help reduce your organization’s risk factor. We know you’re doing your best to put investors first as you help them invest fearlessly, but put special attention to these factors to go the extra mile.

Key 1: Create a Team Who Loves Your Clients
The OCIE will put a flag on any firm that hires advisors who have had infractions in their past, even if those infractions might be brushed away as a little “mistake.” When you add people to your team, add people who display honesty, integrity, and a desire to always put investors first. Your job doesn’t end with hiring, though. Every firm needs education and continued learning programs in place to keep building and nurturing that commitment over the long haul.

Key 2: Use Nitrogen to Create an SEC-Ready Information Packet
You don’t want to be scrambling for information when you receive an examination letter, so put in the time beforehand to prepare your team. We know an exam isn’t a fun experience, so we’ve got some good news for you: Nitrogen helps make it easier. You’re already quantitatively documenting alignment between client risk tolerance and portfolio construction, and we know how far that data goes in case of audit or arbitration. Firms using Compliance Cloud can reduce the stress of an exam by analyzing their book of business for red flags, creating documentation, exporting client information, and putting it all together as a “first-day” presentation to hand to an examiner.

Key 3: Prove Your Clients Are Invested Right
The OCIE is interested—very interested—in why clients are invested in the particular products your team has selected for their portfolios. Put in simple terms, they want you to be able to prove that your clients are invested right (hey, that sounds familiar). If you need to brush up on the details of products clients are invested in, it’s a good idea to do it now so you can explain why they fit each investor’s Risk Number.

Key 4: Prepare for More Scrutiny as You Grow
It’s a simple rule that the larger an organization grows, the more scrutiny it receives from governing bodies. That same rule holds true for financial advisory firms as well, but for good reason. Given their size, larger firms can do more harm to the investing public than smaller firms. As a result, firms focused on growth may be considered to pose a larger risk and be due for more frequent examinations. This should not be a deterrent to growth; it’s simply a fact of life.

By focusing on these four keys, you can keep your firm in good shape and be better prepared for your next SEC exam—but they aren’t the only things you need to know.

Download our white paper on 2019 SEC priorities for more tips on how to fearlessly face your next exam.


Related: Stay updated about the SEC’s advertising rules and how Nitrogen can help you maintain compliance.

Share This Story