Preparing for – and living through – an SEC exam

A compliance officer talks Dominic Diongson through his firm’s SEC examination, while Saw Mill Capital’s chief financial officer explains her plan.

Anonymous CCO

When the Securities and Exchange Commission pops up on the Caller ID it feels like “you’re back in high school or college, and you’ve got this exam coming up and you have the nightmare that you didn’t study for it,” says one chief compliance officer at a GP. He didn’t have long to prepare, either – the officials arrived three days later.

His concern was whether the regulator really understood his firm’s processes. “We spent a lot of time focusing on things that we don’t consider as risks even though the SEC may consider them as risks as part of their larger regulatory canopy.”

The regulators were assessing the what the firm was doing and understanding it. The way the firm thought about risk management was also under scrutiny, and the agency appeared to be working from a checklist.

“I noticed that during a lot of our talks they sort of flip open a page and check something off. So clearly they have some list of things that they’re looking for. And they’ll come back, ask questions of how we deal with things and how we went through things,” he says.

The SEC can continue to request information after the exam, and in this case the closing letter arrived two months later.

However, the CCO is positive about his experience, calling it “a good exam.”

Blinn Cirella

One firm agreed to go on the record on how to prepare for the inevitable.

Blinn Cirella, chief financial officer at Saw Mill Capital, says she has a system in place to handle an exam, even though the firm hasn’t been targeted since it was founded in 1997.

When she receives a letter from the regulator informing of an impending exam, Cirella will assemble a team comprising herself, the chief compliance officer, the compliance attorney and possibly the controller. The working party  will figure out who is responsible for which aspect of the exam and decide how long it will take to pull together the requested information.

“Can we accomplish everything in the timeline? Do we have everything we need? And then that means coming up with a strategy to accomplish all of that,” she says.

A key part of that is working with the SEC to comply with their needs, Cirella says.

“I’ve been through some Internal Revenue Service audits and generally with those folks if you’re genuine and act in good faith, you produce what’s requested, they’re actually pretty good about it,” she says. “I feel that the audits were not as adversarial as they might have been. That’s the big thing, you don’t want to create this adversarial kind of relationship.”