At ACA, we understand that preparation is key, especially when facing the complexities of SEC examinations. That’s why our SEC Mock Exams team is grounded in deep regulatory knowledge and practical experience. In this exclusive interview, we connected with Michele Foldenauer, a former SEC examiner, whose insider perspective adds exceptional value to our mock exam process. From behind-the-scenes insights to actionable advice, this conversation highlights how our team empowers clients to meet evolving regulatory expectations.
Background and Career Journey
Can you tell us about your career path and what led you to become an SEC examiner?
My path to becoming a regulator after law school was not direct. I actually started in the entertainment industry at a record label, and from my experience there, pivoted to banking. I went to work at a major NY bank in their corporate trust department for seven years. I managed over 200 municipal and housing bond relationships across the country. I had the pleasure of working with real estate developers, bond underwriters, public finance law firms, and government entities to put together bond issuances and refinancings. At the bank, once the deals closed, we would manage the ongoing trust indenture compliance along with the investment management of the proceeds.
It was during this time that I was asked by an individual who had worked at one of the underwriting firms to join his newly formed investment advisory and consulting firm specializing in affordable housing financings. It was a small firm, so it was all hands-on deck. Our clients were real estate developers that needed to put together financing for their large multifamily community projects. This is where I gained consulting experience working with private clients—developing financial projections, negotiating with bond issuers, banks, and federal mortgage purchasers, and meeting their financing compliance obligations.
When the housing crisis was in full swing is when I transitioned to compliance regulation as a state investment adviser and broker dealer securities examiner. Working in a state that was often called the fraud capital meant there were a considerable amount of interesting examinations. After five years at the state level, I moved to the Commission as an examiner in the Chicago office. After two years, I joined the specialized Private Funds Unit.
What initially drew you to the world of financial regulation and compliance?
My initial draw to financial regulation and compliance started with my compliance work in public finance. I enjoyed the analytical process of document review along with identifying and managing compliance covenants and risk. It was an opportunity to not only apply my legal education, but I found it incredibly interesting.
When I became a state examiner, the examinations and working with the fraud investigators became the icing on the cake. I liked the aspect of seeing different firms and how they managed their business, strategies, and compliance. One of my colleagues described their former work at the SEC, and I decided that’s where I needed to be.
How did your role evolve during your time at the SEC?
During my tenure at the SEC, I started the Chicago regional office investment adviser and investment company program. After two years, I transitioned into the nationally-focused specialized Private Funds Unit. This shift allowed me to focus on an interesting and varied niche segment of the market, where the complexities of private funds required a different analytical skill set and the ability to participate in examinations of firms across the country rather than just regionally.
Insights from the SEC
What were some of the most common compliance issues you encountered during examinations?
Some of the most common compliance issues I encountered were related to inadequate disclosure practices. For instance, some firms struggled with providing investors with clear disclosures surrounding expenses, affiliated service providers, investment allocations, and level of risk. Similarly, other firms employed an inconsistent application of the policies and procedures related to the same areas of risk.
Another recurring issue was the implementation of valuation procedures, especially in real estate and private equity funds. The lack of robust policies and procedures/internal controls in these areas would lead to deficiencies.
Cybersecurity was another area that became increasingly prominent. As financial services became more reliant on digital platforms, the risks associated with data breaches and inadequate cyber defenses began to take a more prominent presence in risk-scoping examinations.
Can you share a memorable or particularly challenging case you worked on?
At the state level, I often worked with individual investors who would sit in our offices in tears having lost their life savings to misappropriation. Affinity fraud and unregistered activity was a common occurrence at the state level.
At the Commission, it was rare to reach out to individual investors in the Exams program, but I didn’t view the risks any differently because at the end of the day, even in private funds, whether there were individual people invested through the large pension funds or large institutional investors, these groups were placing their trust with advisers and regulators alike.
A few memorable exams involved instances where inconsistencies in fee billing and expense allocation practices were identified resulting in significant refunds due to investors. Most times these occurrences are inadvertent mistakes, but the financial impact is the same.
The meme stock and crypto outreaches and exams were also interesting from the perspective of evolving risks and technology.
Sometimes reviewing these complex issues and risks required extensive analysis and collaboration by the exam teams along with the participation of other offices and divisions within the Commission or international regulatory bodies. Seeing other perspectives and using those to inform what you do was not something I took lightly.
How did your work at the SEC shape your understanding of risk management and internal controls?
I gained a better understanding of the importance of the use of data analytics tools and leveraging technology for risk identification.
Also, with the meme stocks and crypto exams, talking with a number of different market participants offered a broader view of the evolving landscape of compliance challenges and new technology. The ability to see across multiple firms gave a window into real time- shifting market dynamics and increasingly complex financial instruments.
I learned early on that a one-size-fits-all regulatory compliance approach to oversight doesn’t work. It sounds like a cliché, but it’s true that tailored compliance frameworks are needed to address the nuances of specific firm operations.
From Regulator to the Private Sector
What was it like transitioning from a regulatory role to the private sector?
Transitioning from a regulatory role to the private sector has been an exciting journey. It offers a fresh perspective for us and the clients on the “other side” of compliance. It allows us to be able to give advice and offer solutions that as regulators we weren’t permitted to do; an opportunity to leverage regulatory insights to navigate compliance questions.
How has your experience at the SEC influenced your current work and approach?
My experience at the SEC has provided invaluable insights into leveraging this dual perspective of the expectations of regulators with the operational realities of firms to develop practical solutions within the regulatory compliance framework.
Looking Ahead
What trends or changes do you see on the horizon for regulatory compliance?
The future of regulatory compliance is poised for transformative technology changes. For instance, I believe over time the use of blockchain technology will contribute to advances in compliance management along with the continued use of AI.
The pendulum swings back and forth with each new administration, new Chair, or new Commissioner as what areas are most important to the Commission, but firms need to continue to be comprehensive in their approach to creating and maintaining a robust compliance program.
How do you think the role of technology is changing the way firms approach compliance?
Technology is creating efficiencies in compliance with advanced tools and systems that streamline daily work. For instance, AI enables firms to analyze larger amounts of data and detect potential risks in a fraction of the time previously required only a few short years ago.
Automation created by technology integration saves time and contributes to more informed decision-making by compliance staff and other business professionals within the organization.
Closing
Michele’s perspective offers a unique, insider view into how the SEC approaches enforcement and compliance, insight that’s invaluable for firms navigating today’s dynamic regulatory environment. As financial regulations continue to shift, staying informed isn’t just beneficial, it’s critical.
Looking to enhance your compliance strategy with guidance from former SEC professionals? Reach out to our SEC Mock Exam team to discover how a customized mock exam can help position your firm for regulatory success.