Earlier this year, IA Watch conducted an extensive video interview with Drew Bowden who is the director of the SEC Office of Compliance Inspections and Examinations (OCIE). The OCIE is the division within the SEC that conducts audits of registered investment adviser (RIA) firms. The full interview is split into five segments. In each segment, Mr. Bowden reveals a number of compliance and regulatory insights that are of great interest to SEC-registered investment advisory firms. Last week we discussed segment 3 which focused on the role of an outside investment adviser compliance consultant and the SEC’s educational outreach. Below is a recap of the fourth segment.
This segment addresses the question: When the SEC notifies your firm that it’s coming for an exam, is it alright the Chief Compliance Officer (CCO) of the firm to coach staff prior to the examination? Mr. Bowden’s answer is simple and without hesitation: “Sure!” He goes on to say, “I was in the industry and I was examined. I certainly talked to my employees before they went in to meet with the SEC.” However, Mr. Bowden notes that it’s more a question about what the CCO is instructing the RIA firm’s staff to do. For example, he states “It’s perfectly appropriate to explain to them what the process is and explain to them what the ground rules are.” On the Contrary, he emphasizes that coaching staff to respond to SEC examination questions by being evasive, lying, or not answering questions” are all examples of obvious inappropriate conduct. He states that a CCO who is “administering that type of coaching is probably putting themselves in harm’s way in terms of the examination staff and the federal securities laws.”
On the subject of the SEC’s current view on CCO liability, Mr. Bowden makes it clean that, “nobody here is on a trip to go get CCOs. There have been a small number of cases where they’ve been brought, but the facts have usually been, I think, facts where you’d say the CCO has failed in his/her responsibilities in a significant way under the federal securities laws.” He goes on to reassure RIA Chief Compliance Officer’s by noting that if a CCO is to review those cases carefully, they will see that the SEC is “not pushing the envelope,” and that the CCOs in question have been out of bounds by a reasonable measure.”
As RIA compliance consultants, we encourage the CCO of all RIA firms to review the SEC OCIE website as well as our “10 Steps to Prepare for a Regulatory Exam” checklist to ensure that your advisory firm is fully prepared for an exam.
The full video of part 4 IA Watch’s interview can be found on Youtube. Be sure check back soon for our final recap on part 5 of the interview.