Examiners with the U.S. Securities and Exchange Commission (“SEC”) typically send firms an advance list of who they want to interview for two reasons: scheduling and availability purposes and to provide an idea of their expectations while they are onsite.
We recommend that, in return, firms should also spell out certain expectations of your own to examiners with the intent of benefiting both parties, as well as to expedite the process.
This correspondence should come from or establish a sole point of contact or firm liaison for the onsite visit. This is a best practice for SEC staff interviews before the exam begins. Starting this communication expectation early will let the SEC know you expect all requests for information and interviews to be funneled through that one point of contact, which should be your firm’s Chief Compliance Officer (“CCO”). The CCO also should be present for every employee interview and take notes to reference later.
#1: Proper Preparation is Paramount
Examiners frame their questions to learn about an individual’s experience and professional qualifications, as well as their roles and responsibilities at the firm. The SEC’s line of questioning relates to the examiners’ foremost purposes for being there – learning how an advisory firm handles its activities, workflow, and commitment to a culture of compliance to ensure that proper risk management is in place for the benefit of clients.
If you are worried about any specific issues or gray areas the SEC may find during an examination, seek counsel right away. Perhaps it’s not as big of a concern as you think, but specialized and experienced professionals can provide counsel on specific information relative to your firm the SEC will be seeking during the interview process. It’s important to gain clarity on those situations before the Staff shows up at your office door.
Mock Examinations
There is no better way to prepare than to go through a similar experience, such as a Mock SEC Examination. Clients find mock exams conducted ahead of time by experienced and knowledgeable experts to be very helpful, as it logistically, physically, and mentally prepares your team for SEC Staff. As part of our process, Jacko Law Group, PC (“JLG”) performs worst-case mock interviews where we ask clients about their potentially most troublesome areas and follow up with challenging related questions.
This examination “dry run” will familiarize clients with relevant questions before the exam and prepare them with adequate responses and references about their firm and their approach to compliance. It’s better to have designated employees field those questions from outside counsel before they’re asked by regulators. Also, in addition to the questions themselves, we ask clients what related documents they plan to provide the SEC.
#2: Less is More or Enough
Employees who haven’t been properly prepared in advance for an SEC exam often talk too much, start rambling, and not making sense. When that happens, the SEC examiner begins to wonder what could be making someone that nervous. This also opens up an opportunity for employees to offer too much information in their nervous and uncomfortable ramblings.
We understand that having to represent your firm and answer questions from SEC examiners can be nerve-wracking. We collaborate with clients to ensure everyone is in a clear and comfortable mindset when being interviewed. Below are a few simple modifications that our team often suggests to clients and participants.
- Wear comfortable clothes. This helps those being interviewed to remain confident, calm, collected, and comfortable during questioning. Although attire may seem like a small detail, we find that when employees are physically comfortable the interviews are less awkward, stiff, and employees are less nervous than they need to be.
- Select a room familiar to employees for all interviews. Being questioned by a regulator is difficult enough without having to do so in unfamiliar surroundings. Again, environment is a key ingredient to comfort and confidence and awkwardness leads to nervousness. Some clients incorrectly assume they will be interrogated like suspected criminals you see in the movies or on television.
The team at JLG makes it a personal goal to make SEC Examinations as simplified and seamless as possible for our clients – and preparation is essential to our process, including the environment. Rest assured your team won’t be placed under a bright light in a dark room, but it’s essential to recognize the impacts of environment and stress has on the information you provide examiners.
While being open and bringing things to light is freeing, too much light has the ability to blind. We typically encourage clients to disclose as much information as possible, but in this specific scenario, during an Examination – we preach that less is often more or just enough. Firms should provide just enough disclosure during an interview and not an overabundance of information during questioning. As the latter may provide the SEC with information that may start a search or investigation in every nook and cranny. During examinations specifically, we recommend that our clients fully provide and disclose precisely what the SEC wants, and nothing more.
#3: Each Interview and Question has a Specific Purpose
During an interview, remember that every question you’re asked has a purpose. The SEC doesn’t waste its time with immaterial questions. If you don’t understand the question, firms and their employees should feel empowered to ask for clarification.
Specificity is essential to interviews, but so is continuity. On occasion, firm employees do not ask for clarification on questions or requests and make the mistake of changing their response if asked the same question more than once. Providing consistent answers is integral. Employees should be truthful, even if they don’t have an answer to a specific question. In scenarios of doubt or uncertainty, make sure your team knows that “I don’t know, but I’ll provide the information as soon as possible” is an acceptable response. You never want your staff feeling the need to guess or assume and respond with “I’m not really sure, but I think the answer is . . .”
Adequate preparation for an upcoming SEC examination and interviews needs a multi-level approach. Reviewing the adequacy of your compliance program and your initial requested documents will help alleviate fear, raise your comfort level, and minimize the chance of a misstep in the process. The advantage of experience and knowledgeable counsel during an examination is also an essential component to navigating similar scenarios with the SEC. For more information or to discuss mock SEC examination with our team, contact us to schedule a consultation.
