In the past 2 years, we have seen a clear uptick in desk exams by the SEC’s investment adviser examination staff. These “desk” exams consist of the staff sending a preliminary document request (the same as they would if they intended to arrive in person), reviewing the materials presented, and then typically sending additional requests. Sometimes requests from the staff can reach double digits depending upon what information is previously submitted. Following that production, and any subsequent follow-up phone calls, the staff typically issues a deficiency letter and the registrant responds.

There are pros and cons to this kind of exam. The pros are that personnel don’t have to get terrible cases of “agida” concerning talking to the staff or letting something slip around the water cooler. Although not always the case, these exams generally end sooner than in-person exams. The biggest con seems to be that the staff gets no real feel for the organization. That can be regrettable if the result is that the staff’s deficiencies fail to take into consideration actual business practices. To offset the negatives associated with this kind of exam, it is important to maximize the opportunities to explain to the staff what the adviser’s business is (emphasizing what it isn’t in many cases), and to convey how important providing fiduciary services to clients is to the firm. That communication is best if it comes from the top of the firm so long as the person communicating has been prepared with Do’s and Don’ts in talking to the staff.  Examples of Do’s and Don’ts include:

  • Always tell the truth!
  • If the questioner shows you a document, carefully review the entire document before answering any questions about it. If you have not seen the document before or do not recall the document, say so.
  • Do not let the questioner mischaracterize your answers. If the questioner puts your answer in his or her own words and asks you to agree with him or her – be careful. You can repeat your original answer if you disagree with the questioner’s description of your answer.
  • Do not disclose communications between you and your lawyers, both internal and external.
  • Listen to each question carefully and only answer the question.
  • Pause before answering any question and think about your answer before giving it.
  • If a question has a yes or no answer, just say yes or no. Do not embellish.
  • Don’t be afraid to say, “I DON’T KNOW.” If you want to offer to get an answer to a question that you don’t know, that is what you can say.
  • Never guess what the answer is. Either you know or you don’t know.
  • Don’t get drawn in to filling silence. Asking a question, hearing the answer and then being silent is a time-honored investigator’s trick to unsettle the deponent into filling the silence with unnecessary talk.
  • There is nothing to win here so don’t think that what you would add is just what is needed to put the company in the best light.
  • If the questioning takes place in person, look the questioner in the eyes and don’t fidget or squirm – body language speaks volume.

Lastly, when producing documents, don’t forget to Bates Stamp each page and request confidential treatment under the Freedom of Information Act. It may be hard to believe but we assisted a client in an exam over 5 years ago, and, thankfully, did this. Fast forward and someone had made a FOIA request of those documents. Without having stamped and requested confidential treatment, important information likely would have gotten into undesirable hands.

So regardless of the form of an exam, best to be prepared and on your toes – whether the SEC staff shows up or not.

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