At ACA, we believe that preparation is power, especially when it comes to navigating the complexities of SEC examinations. That’s why our SEC Mock Exams team is built around deep regulatory expertise and real-world insight. In this exclusive interview, we chatted with Robert Baker, a former SEC examiner whose firsthand experience brings unmatched value to our mock exam process. From behind-the-scenes perspectives to practical guidance, this conversation reveals how our team helps clients stay ahead of regulatory expectations.
Background and Career Journey
Can you tell us about your career path and what led you to become an SEC examiner?
I worked at a big law firm for five years doing broker-dealer and investment adviser litigation and regulatory defense. I joined the SEC in 2007 as an enforcement attorney. In my early days at the SEC, I had the opportunity to lead a significant investigation and eventually work on a trial involving significant investor losses incurred when a fund company made big bets on subprime investments in the years leading into the financial crisis. From that case, I learned a lot about portfolio management, valuation, risk management, compliance, marketing, and fund governance, which are the bread-and-butter issues of the Investment Advisers Act and Investment Company Act. Based on that experience and my work on a couple of Ponzi scheme cases, I became one of the founding members of the Asset Management Unit (AMU). Including our supervisor, there were four of us in Boston who had this role. AMU and other units within the Enforcement Division were formed in 2010 to develop specialization to tackle some of the issues that gave rise to the financial crisis or surfaced in its aftermath. AMU’s specialization was investigating cases related to investment advisers to private funds, mutual funds, and separately managed accounts. They were the group that brought about a dozen cases against private equity advisers in the few years after they were required to register with the SEC.
I was part of AMU from 2010 to 2023 and rose in the ranks from Staff Attorney to Senior Advisor to Assistant Director. In my role as Assistant Director, I supervised cases and co-chaired the Boston office’s exam referral committee for about a decade.
In late 2022, there were several retirements in the management ranks of the examination program in Boston, including most of the attorneys who were supervising exams. I had developed great relationships with examiners and their supervisors (including my old AMU supervisor who had moved up to run the examination program in Boston several years before) and thought it would be a good opportunity to both grow and offer my enforcement and legal expertise to help develop examiners. Personally, I also thought a move to the exam program would offer better exposure to asset management industry issues. Exams, unlike enforcement work, also offer the opportunity to see how firms with strong compliance programs operate. You truly see the good, the bad, and everything in between. The move proved to be even more than I had hoped it would as I supervised an excellent team and had the opportunity to help develop three new examiners who joined my team around the time I did. But I do sometimes miss investigating cases and have no regrets about the time I spent doing that work.
What initially drew you to the world of financial regulation and compliance?
Working at the SEC was my dream job when I applied for it. I went to Harvard Law School, and my first elective class was about complex litigation. At the time, I thought class actions were a great area of practice because they could have a big impact on the world. As a summer associate, when I said I wanted exposure to class actions, it turned out that meant employment law or securities law. But I learned that I did not like employment law and loved securities law. I enjoyed learning about both the law and investing. I decided to join one of these law firms in an investment management practice that was flush with arbitration and regulatory work from the “Tech Wreck” of the early 2000s.
During my years at the firm, I enjoyed working on state, FINRA (although it was NASD and NYSE back then), and SEC examinations and investigations. An SEC attorney who worked on examinations and later led the Boston office exam program was part of my firm’s alumni mentor network. I reached out to him about a possible career at the SEC and immediately fell in love with the idea. I ended up getting a job as an enforcement attorney a few months later, but I was planning on applying for a position as an examiner if that hadn’t worked out.
Insights from the SEC
What were some of the most common compliance issues you encountered during examinations?
The answer really depends on the type of firm, including the types of clients and the size and resources of the compliance program.
For smaller wealth managers with leaner compliance resources, it was pretty common to have less complex violations such as:
- Compliance policies that didn’t address all the issues in the Compliance Rule adopting release or some relatively obvious risk areas at the firm.
- Custody problems where the adviser didn’t realize it had custody and might be unaware of the specific Custody Rule guidance in Division of Investment Management FAQs.
- Various Code of Ethics violations stemming from employee trading or trade reporting.
- Marketing Rule violations, especially with firms that had not really changed their practices before the compliance date for the new Marketing Rule.
- Various issues when we checked fee calculations, including inconsistent application of advisory fee breakpoints.
- Wealth managers that invest in ETFs and fail to file Form 13F.
- Hedge clauses – provisions in advisory agreements that disclaim the adviser’s liability to the client based on a lower standard of care than the Advisers Act (e.g., gross negligence instead of negligence).
For firms with private fund clients and significant resources dedicated to compliance, we would still see a lot of violations of the Marketing Rule. This is hardly surprising for a new rule that was scoped in as a risk area on most of the examinations I worked on during my two years in Examinations. Examples included:
- Not reviewing older articles or website content that was put up before the new Marketing Rule.
- Third-party ratings, endorsements, or testimonials that were not recognized as such with appropriate disclosures.
- Not appreciating a particular metric was performance (and therefore required showing net in addition to gross performance).
I wouldn’t say there were common issues with larger firms, but you’d see disclosure issues related to nuanced conflicts of interest, such as inadequate disclosure around expense allocation or use of affiliated service providers. We’d often cite firms for language in private fund offering documents related to limitation of liability or confidentiality that we felt were hedge clauses or that that violated Exchange Act Rule 21F-17 (a.k.a., the Whistleblower Rule) for not carving out the ability of limited partners to voluntarily self-report to the regulators.
Can you share a memorable or particularly challenging case you worked on?
They were all memorable, but I’d single out the subprime related case I mentioned already because it was fascinating and complicated and gave me foundation for everything I’ve done since that case. I’d also have to say F-Squared and all of the other cases that we brought for firms that advertised F-Squared’s fake and inflated track record. That case was referred by examiners, and I worked with a large team of attorneys from AMU and the Boston office on that specific case and others that flowed from it. Many of these people are still close friends from the bond you share working on significant cases and especially trials.
I also did a lot of Ponzi cases, and the Ponzi cases that we broke open with a little detective work were exciting and impactful. I also recall barring one person for engaging in a valuation scheme at a hedge fund who almost immediately turned around and started a Ponzi scheme, so I had the privilege of barring him twice. We caught another hedge fund Ponzi defendant on a cold call, and he walked into SDNY the next day. He ended up cooperating on unrelated criminal schemes that landed a lot of people in prison. That defendant got a significantly reduced sentence and now he’s consulting for people about to go to prison for white collar crimes similar to Kevin Hart’s character in Get Hard. You can’t make that up!
Overall, I had the privilege of leading or supervising about 200 settled or litigated actions involving investment advisers when I was in Enforcement, and I referred over a dozen more when I moved to Examinations.
How did your work at the SEC shape your understanding of risk management and internal controls?
When you spend almost 20 years doing SEC cases and examinations, you see a lot of different approaches to risk management and internal controls. While everything is, of course, facts and circumstances, you see how firms address similar issues. Some of those controls avoid problems that others don’t avoid by not having reasonable controls. When you’ve been doing this for long enough, it doesn’t take long to compare a firm’s internal controls to what you’ve seen in the past that did or didn’t work. I think when you move over to the consulting side, you lean on that experience a lot because many of our clients have reasonable internal controls. For those clients, we might be able to compare with other clients who also have reasonable internal controls, but the SEC experience helps in assessing what’s reasonable or not because you can also pull in the broader experience with firms that didn’t have reasonable internal controls and got cited in a deficiency letter or were part of an enforcement action.
From Regulator to the Private Sector
What was it like transitioning from a regulatory role to the private sector?
I currently lead a mock examination team, so it was not a difficult transition. When I tell my former colleagues about what I do, I summarize it as, “I try my best to simulate the experience I would create in leading a real exam.” The crucial difference is that we can offer advice along the way. I remember being on exams where a firm would have a very reasonable question about how to solve a deficiency. We’d try and find ways to inform the firm about certain guidance like the Custody Rule FAQs or the Commission’s 2019 Fiduciary Interpretation, but it is a lot more satisfying to just give firms advice. Also, ACA was founded by people with our SEC backgrounds and has a large group of consultants and others who were former securities regulators. So, yes, it’s private sector, but the people who do the work are not too different from where I came from.
The final thing I have to say is in response to some recent criticism of government employees that I think is coming from a place of misunderstanding what motivates civil servants. Some government employees are compensated fairly and others are not, but compensation is not what motivates a government employee. Nor are performance evaluations, which happen in government but don’t really matter in most circumstances as they seldom have any bearing on future compensation or promotions. Bonuses are either non-existent or too insignificant to change behavior. And yet, I’ve witnessed first-hand how the culture for high achievement in government can far exceed the private sector. Why? Many government employees do their jobs because they believe in the mission of their work. They also work hard to support their colleagues who also believe in the mission of their work.
I think having almost two decades of this experience prepared me well for a move back to the private sector because it deeply engrained an attitude that I want to always be building a culture where everyone strives to do their best to do right by their colleagues. If you have that mindset, you can succeed just as well in the private sector as the public sector.
How has your experience at the SEC influenced your current work and approach?
Michele Foldenauer and I co-lead ACA’s Mock Examinations team. Our clients engage us for mock exams and other reviews because they want the benefit of our SEC examiner backgrounds — that experience informs everything we do. When we spot issues the SEC might flag, we draw on that same experience to identify solutions that both work best for the firm and are most likely to meet the SEC’s expectations.
Looking Ahead
What trends or changes do you see on the horizon for regulatory compliance?
Technology and especially artificial intelligence. We already see many firms transitioning compliance functions (e.g., trade monitoring, employee trading and Code of Ethics, marketing review, and eComms review) that used to be performed by in-house compliance staff to consultants (e.g., ACA’s Managed Services group). I think, in the next few years, we’ll see those same services enhanced by artificial intelligence tools, which is where ACA is heading as a firm.
We also know our clients are struggling with the regulatory pendulum swinging back and forth at the SEC. I have seen first-hand that over time that pendulum is swinging more widely and more frequently. I think the trend has been so significant that we shouldn’t expect this to change. What does that mean for trends? I think it means that while we are certainly in an era of regulatory pullback, we should assume the regulatory environment and rule proposals of the past few years will return at some point in the future. Now is a great time for firms to do the types of compliance reviews they put off the last few years because they were reacting to a steady supply of new rules, new priorities, unexpected cases, etc. Get the house in order before the pendulum swings again. And don’t assume it will change in some fixed timeframe like 3.5 years. I’ve also seen how market events change the direction of the regulatory pendulum regardless of who is in power. People who espouse deregulation tend to change their tune when their constituent’s life savings take a big hit.
How do you think the role of technology is changing the way firms approach compliance?
At this point, there is no substitute for human intelligence with respect to pretty much anything compliance professionals do. But artificial intelligence already offers the ability to be more comprehensive, and that will only increase every day that goes by. An example is eComms review. Right now, a firm could use search terms to come up with a good sample of emails to be reviewed by compliance professionals. The professionals will likely do an excellent job identifying any relevant issues in the sample they review, but they won’t read the vast majority of eComms. But artificial intelligence is designed to review everything. It might not do nearly as good of a job identifying all relevant issues, but there are ways to achieve “human in the loop” in eComms review and other contexts that significantly expands the scope of compliance review. I started to see that at the SEC almost a decade ago when we could use email review technology to create “seed” sets of key documents and then ask the technology to find more documents like the seed set. That was revolutionary at the time and considered basic now.
Closing
Robert’s insights offer a rare, behind-the-scenes look at how the SEC approaches enforcement and compliance—knowledge that’s invaluable for firms navigating today’s regulatory landscape. As financial regulations continue to evolve, staying informed isn’t just smart, it’s essential.
Ready to strengthen your compliance posture with insights from former SEC insiders? Connect with our SEC Mock Exam team today to learn how we can tailor a mock exam experience that prepares your firm for success.