SEC Boston office conducting ‘surprise’ examinations

Firms in the city urged to consider how they would respond if the regulator turned up unannounced.

Boston-based private fund managers should be prepared for unannounced visits and exams from the Securities and Exchange Commission, according to compliance sources.

Speaking at sister title Private Equity International’s Private Funds Finance and Compliance Forum in San Francisco on Wednesday, experts said firms in the area should discuss what they will do in the event of a surprise knock on the door.

“The SEC doesn’t gain much from the visits, someone may be out of the office, firms might not be prepared, but they are happening, so there should be a discussion about who will be the back-up in the event a key person is away,” a partner at a third-party compliance service provider said.

Firms based in the city are advised to have a short discussion of tactic, and be even more vigilant in ensuring documentation – such as that detailing deviations from fees and expenses policies – is up to date.

“It’s unlikely to spread beyond Boston, but internal preparation should be made on the off chance,” a law firm partner based in the city said.

While the unannounced exam may be triggered by an event – such as enforcement action being taken elsewhere – it is largely thought to be a “points on the board” exercise, with examiners looking to cover more ground, the panel said.

Elsewhere, although they are unlikely to be subject to a surprise exam, all non-Boston-based firms should be aware that the standard two-week notice period given before an inspection is being shortened in many cases.

“I’ve seen examples of firms receiving their notice letters on Friday for an exam that will start on Monday,” the compliance partner said, highlighting the importance of ensuring compliance documentation was up to date.

Fees and expenses remain a top priority for examiners, but there is a degree of “regulatory roulette” as to what other areas the examiner will focus on. That said, there are common issues that arise, the panel added.

“Once you know who your examiner is and the office in which they are based, you can identify the areas they are likely to focus on. But the easiest way to ensure a smooth exam is to run a transparent shop,” the chief compliance officer of a firm that was recently examined said.

Firms were advised to be open, co-operative and welcoming with their examiner, as the relationship between the SEC staff and the firm could be the difference between an enforcement action and a letter of no action.

“Get them over the trust hurdle as early as possible, examiners have a lot of sway; if there is a marginal deviation then showing you are willing to take action to get it right – rather than taking a defensive approach – could help,” the compliance partner said.