Securities and Exchange Commission Examiners are beefing up their staff and are more likely than ever to show up on your doorstep. So what are the likely outcomes?
The SEC recently announced that it’s shifting resources from the broker-dealer side over to the investment adviser side. It’s leaving the broker dealers for FINRA and putting those examiners on investment advisers and fund managers.
As a CCO you need to prepare senior management for a poor or bad outcome. That is the most likely end result of an exam.
Only 4% of examinations will result in a “no further action” letter or “no comment” letter. These letters do not say that the firm is okay. They merely say the exam didn’t find anything that requires further action.
That means 96% of exams result in the SEC finding something wrong and requiring you to make changes.
A little over 20% of exams result in referral to enforcement. That is obviously a bad outcome and your lawyers will likely get involved.
In about half of those referrals, the enforcement staff begins an investigation. You will definitely need your lawyers in this situation.
When the exam staff come to your firm, there is 1 in 10 chance that you will have to lawyer up.
Of course, the exam staff does not come to every firm. They have a algorithm that rates the risk at each firm. The exam staff culls through the list of possible firms to examine and decides to exam those that seem higher risk or meet the criteria for a particular initiative.
Real estate fund managers were in the crosshairs of the exam staff last year and the year before. Expect to see some enforcement actions coming as those firms work through the process at the bad end of the exam results.
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