Whew! Did everyone get their annual amendment filed on time? The deadline was March 30th. Now that the annual exercise is done, it’s time to focus on the next regulator event in your life; your firm audit!
It will happen one day, most of us just don’t know when. If you are a SEC registrant, your audit cycle can be every 10 years. Of course, one of the existing missions of the SEC for the last two years is to visit every RIA firm that has not yet been seen.
The SEC is fairly methodical and will more than likely reach out to you by email and ask you to be available for a conference call a few days later. That conference call can follow several formats. Be prepared to discuss your business model and be able to talk fluidly in reference to all your ADV filings. The regulator just knows you by the forms you file so that is their first impression of your firm. Yes, they will also do an Internet search on the firm and the principals to get your “footprint” so be prepared to talk about your advertising.
After the phone call you’ll receive a document request list and be asked to deliver documents within days. Yes, days not weeks or months. Keep in mind that this document request will primarily be historical documents that you should have been keeping so the regulator knows it is a matter of providing a download to them. No, they do not believe that all your documents are kept in a paper based format anymore. This is the electronic information age.
Bottom line, be prepared to produce your required books and records per the Investment Advisers Act of 1940. Rule 204-2; https://www.gpo.gov/fdsys/pkg/CFR-2012-title17-vol3/pdf/CFR-2012-title17-vol3-sec275-204-2.pdf
After your first batch of documents, there will be a second set to produce and you’ll have a couple of weeks to produce them. Importantly among this set of documents will be your trade blotter but it must fit into the specified format given to you by your regulator.
Most times, there will be an “on site” segment to the audit which could take anywhere from one day to a week depending on the size of your firm and your business model. The more moving parts and potential custody issues the more time it takes. Performance advertising always gets a close look.
Now, if you are a state registrant the audit format can be very different. Overall the state theme is to show up unannounced. For some reason the states like the element of surprise. So for the 1% of the advisory community that MAY be acting with criminal intent, beware. For the other 99% it is just inconvenient. Most states follow an interview format developed by the North American Securities Administrators Association (NASAA) called “NEMO”. NEMO will provide interview “modules” to the examiner to fit your business model as presented by your ADV filings. Your on-site interview will last about an hour.
Usually the state examiner will do preparatory work on your firm by pulling your IARD ADV filings and also do an Internet “footprint” review. This includes websites and social media. If you have not heard of the “Way Back Machine” web crawler, GOOGLE it, put in your URL and see what happens.
During the surprise visit you’ll be handed a document request list. That list may have up to 42 different requests on it. One individual request may require several documents to complete the request. The examiners objective is to complete the interview and obtain the requested documents as quickly as possible and go back to their office complex. So, the better organized you are the faster the examiner(s) can be on their way.
How soon will you hear back from the state examiner after they leave to let you know how the audit went? Be prepared for a three to six month wait. One clue, if the examiner keeps getting back in touch for additional documents they either forget to get what they wanted on the first visit or they are looking into something that concerns them.
Each state has its own books and records requirements so there is not just one link for all 50 states. Many states have adopted the SEC’s books and records but don’t go by the link above for your state’s requirements. Go online to your state’s Division of Securities and find their Securities Act which will usually have a required books and records section.
Audits are required by state law and most states try to audit RIA firms on a tighter schedule than the SEC so don’t be surprised if it occurs every four years.
Lexington Compliance and RIA in a Box LLC are not law firms, investment advisory firms, or CPA firms. Lexington Compliance and RIA in a Box LLC do not provide legal advice or opinions to any party or client. You should always consult your relevant regulatory authorities or legal counsel if applicable.