Most will be aware that the major way the SEC enforces its mission of “making a positive impact on the US economy, capital markets, and people’s lives” is through its examination program. These exams are used as valuable tools by the regulator to identify issues that may be harming the participants of the financial markets.

Deficiencies in a regulatory exam can negatively affect your business, making mock exams a great way to help identify areas of weakness in your business operations and avoid repercussions from the SEC.

What does the SEC use exams for?

When the SEC aggregates its exams, it helps point to common issues that exist in the markets, and helps guide regulations and areas of focus for the commission. When severe violations are found, the exam program has the power to move exams to enforcement where they can impose fines on organizations as a punishment for illegal behavior.

What are the main challenges associated with exams?

It would be hard to deny the usefulness of the exam program, although for the individual organization, an exam that is hanging over your head can be a source of great stress and agitation. While you are aware there is some sort of risk-based calculation, based on time since last review, rate of growth, changes in CCO, etc, you never know exactly when that exam is coming.

This can be particularly stressful for those who have never been through an exam before, but even for those that have, most will say that every exam is very different. This can be based on who your examiner is, what the SEC is currently focusing on, and how much your business has changed since your last exam.

How can a mock exam help you prepare for the real thing?

We think one of the best exercises an organization can put itself through is a Mock SEC Examination. This will help test exam preparedness and take away a lot of the questions about what an exam will feel like. It will let you know what areas of your business are ready to be reviewed and where you need to get things in order.

It’s a fantastic way to have a third-party look for issues at your organization that you might be unaware of. A mock exam can also provide some great evidence to show the regulator that you take compliance seriously and can often set the tone in an exam of what the culture of compliance is like at your organization.

Who’s the best person to conduct your mock exam?

Of course, picking who will conduct your mock exam is a key factor. So, what do we think is important to consider before making a decision?

Identify key areas

Understand as an organization what areas of your business are most important to review. Does your business require a general mock exam, or are there specific problem areas you want to focus on? You should then understand if the firm you are evaluating has the expertise to complete the reviews in those areas.

Make a list of the documents required

Make sure that whoever you’re using to conduct your exam can provide a document request list that closely resembles what you’re likely to get from the SEC. Document production is one of the most important part of exams and you want to make sure you’re fully prepared to get the SEC what they need.

Prepare your personnel

Part of the exam should include interviews with key personnel. This is something the SEC will do when they’re examining your firm, so your compliance team as well as the rest of your staff needs to be as prepared as possible.

Keep a detailed report of findings

Finally, you should understand how you will report on the review conducted by the regulator. Formal documents should be drafted that detail the review completed and any key findings. Make sure processes are in place that give you the opportunity to respond to any findings in the off chance you disagree with the person conducting the exam.

As this document will likely end up in front of the commission, it should be something you’re comfortable with and can easily talk through if required.

Ryan Stibich is a consultant in the Americas team at Bovill. He supports investment advisers and broker-dealers on daily operations matters in order to comply with US regulatory requirements.