How to Prepare for Regulatory Examinations and Visits

Firms must proactively prepare for regulatory exams and visits as part of their business-as-usual compliance strategy. SEC examinations tend to be comprehensive, complex, and demanding, requiring compliance officers to demonstrate their deep understanding of business operations, financial transactions, and compliance procedures, across the business. FCA visits and inquiries, while typically less comprehensive, nevertheless may require firms to respond rapidly to challenging questions. In both cases, ongoing preparation and readiness are the keys to success. 

Effective Preparation for Regulatory Examinations 

Compliance officers tasked with managing regulatory examinations or visits should be prepared to give regulators a consistent and accurate account of their business and compliance operations that demonstrates a fluency with regulatory concepts and requirements. Building a cross-functional team ensures regulatory readiness across all business areas and demonstrates operational maturity to examiners. If the compliance team has the resources to organize a production of basic documents ready to be assembled and reviewed on demand, the firm will be able to respond to regulators quickly, demonstrating the firm’s dedication to compliance. 

Effective management of regulatory examinations and visits depends on effective data management. Regulators often demand a broad spectrum of information, making it beneficial to have the firm’s data well-organized and readily available for easy access and analysis. This includes trading data from proprietary accounts as well as employee and related-party transactions. 

Compliance officers should be prepared to discuss the last two annual reviews and explain how the firm addressed any findings. They should also stay current on regulatory alerts and news, as these can shape the questions asked during an examination.

For SEC-registered firms, preparing for an examination also necessitates a thorough review of past examination letters (if your firm has been previously examined) and rectification of any errors in your Form ADV that a previous examination may have revealed. Firms should also be ready to demonstrate how they have resolved issues revealed by annual reviews. Prompt correction of such errors demonstrates a commitment to precision and transparency. 

Understanding and Navigating the Examination Process 

The regulatory examination, visit, or thematic review process typically initiates with a document request. For SEC-registered firms, the regulator’s Division of Examinations has published a risk alert that includes a model examination request letter, providing valuable insight into the types of documents and information typically required during an examination. Reviewing this in advance can help firms strengthen their preparedness and response strategy. Similarly, the FCA has published guidance outlining its approach to supervision and thematic reviews, which can help firms understand expectations and prepare accordingly.

Document requests can encompass everything from intricate lists identifying associated accounts and investment strategies, to compliance program records and marketing materials. A prompt and accurate response to these requests is vital. Respond only with requested materials to reduce risk and maintain clarity. Before producing information to regulators, it should be scrutinized by relevant staff for errors, omissions, and potential issues. 

Prepare to begin the examination or visit by educating regulators about your business operations and strategies; provide a clear and concise presentation of your compliance efforts. This should be a factual depiction, not a sales pitch. Avoid using marketing materials.  Instead, provide a compliance-specific documentation tailored to examiner expectations. Engaging with regulators calls for a strategic approach. Build credibility by swiftly providing documents and requesting extensions when needed. If further documentation is demanded during a conversation, request the staff to formalize it as an official document request. This ensures clarity and aids in keeping track of what has been requested and produced.  

It’s also recommended to maintain a separate, secure file of all documents produced for future reference. The regulator’s objective is to identify deficiencies, not to cultivate friendships with examiners. Maintaining a professional demeanor throughout is key. 

Communication is essential when managing compliance examinations and visits. This includes dialogue with the regulators, management, and employees. Keeping all parties informed about ongoing compliance efforts and potential issues helps manage expectations and ensures everyone is aligned. In the realm of compliance, surprises are not appreciated.  

Any questions posed by regulators that the firm is unable to answer should be researched and answered as soon as possible. Regulators may draw negative inferences when firms are slow to respond to inquiries. If additional times is needed, communicate that proactively—do not leave regulators waiting without an update. 

Understanding that compliance issues are inevitable is important. Regulators are generally more interested in a firm’s handling of an issue than the issue itself. During the exam or visit, the ability to explain how the firm has handled compliance issues can make a significant difference.  

Answering challenging questions from regulators can be daunting. Nonetheless, it is essential to respond to these questions honestly and transparently. Refrain from volunteering extra information or presuming the regulator’s knowledge. If unsure of an answer, it’s preferable to request time to research the answer rather than guessing. You may also ask the regulator for clarification on specific areas. If a question doesn’t apply to your business operations, it is acceptable to say that you don’t have the relevant information.  

It’s important to remember that regulators are human. Your attitude, professionalism, and responsiveness can significantly influence the tone and direction of the exam. Being elusive or confrontational may trigger a more intensive review, as it can suggest you have something to conceal. Maintaining a cooperative and transparent approach is essential to achieving a favorable outcome. 

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