Mock Audit: Successfully Maneuvering Your Way Through an SEC Exam

These are my notes from the “Mock Audit: Successfully maneuvering your way through an SEC exam” session at the Private Fund Compliance Forum 2012. These are my raw notes, so please excuse the typos and rambling.


Panel Members:

There has been a dramatic increase in the SEC’s understanding of private equity and private fund managers. They are developing the internal expertise and understand the business and risks of the business. Of course, it depends on the individual examiner.

It’s a good idea to give them an introduction to the business. You can help frame the exam and their focus. It’s great to run an introductory message to the SEC. You can share the operations, investment strategy, key personnel, and risks.

There has been a push by the SEC headquarters to standardize the exam process. Historically it varied dramatically from SEC Regional Office to Regional Office. The first level of standardization is the document request letter. It has largely been standardized across the country.

An exam can last from a few days to several months. It depends whether they actually come to the office and the type of exam.

The SEC will contact limited partners. As part of the asset verification program, the SEC will compare the firm records to the account records.

How can a firm prepare for a SEC exam?

You are never going to be fully prepared. You are always going to get a deficiency letter. You need to show your compliance program. At least show that you are trying.

One panelist recommended Bates stamping all of the documents. Always keep a duplicate copy and inventory what you give them. One panelist shared an anecdote that a client received a deficiency letter for not delivering a requested document. Even though the client thought they had deliver it, the client had bad records and could not prove that they had given it.

Will an exam address issues for things that occurred before registration? The SEC will likely start from the registration date. If you have the records and information for pre-registration and readily available, then give it to them. If it’s hard, then push back.

Be scrupulously honest. Covering up a problem will often be worse than the underlying problem.

Cooperate. Don’t say no. Try to find what they are looking for and a different way to deliver it or otherwise address the concern.

Do confirm that the exam request came from the SEC. There have been cases of impersonation.

Find a model request list and try to produce all of the information as quickly as possible.

It’s good to have counsel involved in the SEC exam. However, too much lawyer involvement can be a red flag to the SEC. The CCO should always be in the room during an SEC interview.

Make sure you have a point person for the SEC. Best that it be the CCO, but if not available make sure someone else is.

Take time during the day to stop in and ask the examiners if they are getting everything they need and if they are missing something.

Take advantage of an exit interview with the SEC examiners.

Often the SEC examiners will send a draft of the deficiency letter for comment by the firm. You have 30 days to respond to the deficiency letter.

Historically, the typical routine exam will result in a deficiency letter 95+% of the time. The no action letter comes in only1% to 3% of the time.

The most common deficiencies are disclosure issues in the Form ADV, marketing issues, Code of Ethics issues, and the compliance program itself.

Side letter compliance is something unique to private funds.