In an episode of the West Wing television series from the year 2000, Leo McGarry, the President’s chief of staff, tells a story about a man who falls in a hole and can’t get out. A doctor walks by, and the man asks the physician to help him out. The doctor writes a prescription, drops it in the hole, and walks away. When a priest comes along, the man cries out for help. The priest writes a prayer, throws it down in the hole, and leaves. Finally, a friend walks by, and the man shouts, “Joe, it’s me. Can you help me out?” Joe jumps in the hole next to his friend. Shocked, the man screams at Joe and says, “Are you stupid? Now we’re both down here.” Joe replies, “Yeah, but I’ve been down here before, and I know the way out.”

If you’re a Chief Compliance Officer (“CCO”) for a Registered Investment Advisor (“RIA”), you might think that you are down in a hole by yourself. A mock compliance examination can help ensure that you’re not alone in the trenches as you await the day when securities regulators conduct an examination of your firm.

Mock examinations are conducted by seasoned compliance professionals who have helped numerous RIAs and CCOs prepare for examinations by the SEC or state securities examiners. They can help RIAs prepare for a real examination, which can have serious consequences for investment advisors if it goes badly.

A mock examination makes sure that the advisory firm is ready to deal with the voluminous document requests from examiners, as well as their difficult questions. A mock examination can make certain that the RIA’s policies and procedures are thorough, complete, and tailored to the firm’s business model. It is also imperative that members of the firm strictly adhere to those policies and procedures, and that the CCO enhance the policies and procedures as needed during the annual review of its compliance manual.

A mock examination is akin to a dry run and can help advisors avoid compliance mistakes that might do irreparable harm to the firm and the CCO’s career. In addition, a mock examination can help advisors avoid digging a hole for themselves when dealing with examiners. It gives RIAs and CCOs the opportunity to plug the gaps in their compliance program, so they are less likely to receive a deficiency letter following an examination. When RIAs receive deficiency letters, they may be viewed as a higher risk by the SEC’s Office of Compliance Inspections and Examinations. Depending upon the nature of the deficiencies, the firm might receive a follow-up examination in a relatively short period of time. In extreme situations, examiners might refer the RIA’s case to the SEC’s Division of Enforcement.

On November 2, 2020, the Division of Enforcement issued its annual report for fiscal year 2020. During that fiscal year, the SEC brought 715 enforcement actions, despite the challenges resulting from COVID-19. Investment advisory compliance issues led to some of those enforcement actions.

Takeaways

If investment advisors and CCOs are feeling overwhelmed by their compliance responsibilities, a mock examination can help ease their anxiety. Foreside offers several cost-effective solutions for RIAs in need of a mock examination. Furthermore, some insurance carriers for RIAs may offer partial reimbursement for the cost of a mock examination. Generally, the amount of reimbursement is based upon a percentage of the premium paid to the advisor’s insurance company.

Mock examinations give investment advisors and CCOs directions for dealing with examiners. They ensure that advisors are not heading down the wrong path where compliance pitfalls await them.

 

 

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