SEC Examination Process

Our Federal Securities Lawyers Explain What to Expect During the SEC Examination Process

Attorney John W. Sellers
SEC Examination Team Lead
Former DOJ Trial Attorney

The U.S. Securities and Exchange Commission (SEC) regularly conducts examinations focused on assessing and enforcing compliance. These examinations can present substantial risks for companies and firms that aren’t prepared. Preparing for an SEC exam starts with understanding what you can expect during the process.

Overview of the SEC Examination Process

Here is an overview of the SEC examination process:

Selecting an Entity for Examination

As the SEC explains, its examination program “is risk-based.” This means that the SEC does not randomly select companies and firms for examination, but instead selects examination targets for reasons “including, but not limited to, a statutory mandate that requires the Commission to examine the entity; the entity’s risk profile; a tip, complaint, or referral; or a review of a particular compliance risk area.”

Each year, the SEC issues a report highlighting its examination priorities. These priorities generally inform the Commission’s selection of examination targets. As outlined in the SEC’s most-recent report, its current examination priorities include:

Investment advisers and broker-dealers
Registered Investment companies
Self-regulatory organizations (SROs)
Clearing agencies
Municipal advisors, security-based swap dealers, and transfer agents
Information security and operational resilience
Crypto assets and emerging financial technologies
Regulatory systems compliance and integrity
Anti-money laundering (AML) compliance

As you can see, this list is extremely broad. All types of entities involved in the securities markets can face scrutiny from the SEC; and, as a result, entities in all segments of the securities industry need to be prepared for the possibility of facing an SEC examination.

Initiating the Examination

An SEC examination may be either announced or unannounced. The Commission advises: “When [an] examination is announced, [SEC] staff typically phones the entity’s Chief Compliance Officer or regulatory personnel and follows up with a letter notifying the entity of the examination and requesting information, including documents, that the staff will review as part of the examination. . . . When [an] examination is unannounced . . . staff may provide the entity with a request for information, including documents, upon arrival and may conduct an initial interview.” In both scenarios, upon learning that an SEC examination is underway, a targeted entity should promptly engage counsel to assist with its response.

Document Request and Review

SEC staff will typically issue extensive document requests at the outset of an examination. Despite the breadth of these requests, targeted entities are expected to produce all responsive records promptly:

“The Commission expects that in most circumstances records should be available to staff within 24 hours; however, the staff typically provides a longer period of time to produce records. The staff will grant requests for reasonable extensions of time, where appropriate.”

Even if a targeted entity cannot produce all required documentation within 24 hours, it should respond to the request within 24 hours to open a dialogue with SEC staff and work toward establishing a reasonable timeframe. Concurrently, the entity’s leadership team and records custodians should begin working with counsel to identify, preserve, and produce all necessary documentation as efficiently as possible.

Interviews with SEC Staff

SEC staff will also typically seek to interview multiple employees during the examination process. While most interviews will be scheduled in advance, SEC staff may also “make unannounced and unscheduled visits to the entity’s offices” to conduct interviews and inspect the entity’s records on-site.

During the SEC examination process, companies and firms should work with their counsel to ensure that appropriate personnel are selected for interviews, and these personnel should be briefed on what to say (and what not to say) to SEC staff. If not managed effectively, these interviews can be risky, so an informed and proactive approach is key.

Supplemental Requests for Documents and Information

After reviewing an entity’s original document production and conducting interviews, SEC staff may issue supplemental requests for documents and information. At this stage, the entity’s counsel should be in regular communication with the staff members involved, and ensuring that any supplemental requests are appropriately limited in scope should be a collaborative process.

Requests to Third-Party Service Providers and Agents

When conducting examinations, SEC staff also have the authority to request relevant documents and information from third-party service providers and agents, including those “whose activities may have a material effect on the entity’s operations.” While the SEC may send these requests without a targeted entity’s knowledge, to the extent possible, targeted entities and their counsel should seek to maintain a comprehensive picture of the scope of the examination process.

Preliminary Exit Conference with SEC Staff

As the SEC examination process nears its end, Commission staff will schedule a preliminary exit conference. The purpose of this conference is to “discuss the examination status, including any outstanding requests for information, and, if appropriate, to raise any issues identified up to that point during the examination.” This can be a key step in the process, as it affords a structured opportunity to address any concerns (on either side) before the SEC renders a final decision regarding the targeted entity’s compliance.

Final Exit Conference with SEC Staff

Following the preliminary exit conference and any subsequent communications, SEC staff will schedule a final exit conference. During the final exit conference, the target entity “will typically be given an opportunity to discuss any of the issues that the staff has raised during the examination and provide additional relevant information, including any actions that the entity has taken or plans to take to address the issues raised.” As a practical matter, however, targeted entities should seek to address any concerns well before this stage—so that the final exit conference is largely a formality.

Formal Notification of Examination Results

As the final step in the SEC examination process, Commission staff will issue a formal notification of their findings. This formal notification may state that the examination “has concluded, has concluded without findings, or that the staff requests the entity undertake corrective action.” However, as the SEC makes clear, “[n]one of these outcomes forecloses the Commission from taking any action, including but not limited to an enforcement action, against the entity.”

As the SEC also makes clear, “[e]ven if the staff’s written notification does not address a particular activity, this does not mean that all of an entity’s activities comply with the federal securities laws.” As a result, the SEC examination process is effectively all risk and no reward. Even if a targeted entity gets through an examination unscathed, the entity cannot take this as an indication of SEC compliance.

Dr. Nick Oberheiden

Founder

Attorney-at-Law

Lynette S. Byrd

Former DOJ Trial Attorney

Partner

Brian J. Kuester

Former U.S. Attorney

Hon. Kevin McCarthy

55th Speaker, U.S. House of Representatives (ret.)

Government Consultant

Mike Pompeo

Of Counsel

Former U.S. Secretary of State

John W. Sellers

Former Senior DOJ Trial Attorney

Linda Julin McNamara

Federal Appeals Attorney

Nicholas B. Johnson

Former Prosecutor

Roger Bach

Former Special Agent (DOJ)

Chris J. Quick

Former Special Agent (FBI & IRS-CI)

Michael S. Koslow

Former Supervisory Special Agent (DOD-OIG)

Ray Yuen

Former Supervisory Special Agent (FBI)

FAQs: Effectively Managing an SEC Examination

What Should Targeted Entities Expect from an SEC Examination?

During SEC examinations, Commission staff have substantial authority to request documents and conduct interviews in furtherance of their efforts to assess targeted entities’ compliance programs with federal securities laws and regulations. As a result, these examinations can present substantial compliance risks, and targeted entities must be prepared to respond appropriately. Insufficient or ineffective preparation can significantly increase the risks (and costs) involved, as a targeted entity’s inability to respond to the examination appropriately will itself be viewed as a red flag for noncompliance.

What Types of Documents are Entities Expected to Produce During SEC Examinations?

SEC staff will request numerous forms of documentation during the examination process. Typical requests include:

Organizational and operational documents
Compliance policies and procedures
Accounting records
Pricing records and other financial documents, like private fund fees
Vendor and client contracts
Internal investigation and compliance enforcement records
Records of threatened, pending, and settled arbitration and litigation
Records of pending and resolved administrative and enforcement proceedings
Documentation of any remedial actions taken in response to the above

Even this is just a small sampling. Responding to an SEC examination is a time and resource-intensive process; and, to avoid errors and oversights during the response process, targeted entities must work closely with experienced SEC compliance counsel.

What Are the Potential Outcomes of an SEC Examination?

SEC examinations can have outcomes ranging from SEC staff issuing a “no findings” letter to triggering a federal securities fraud investigation. To mitigate their risk, targeted entities must take a proactive and strategic approach based on the advice of counsel, and they must be able to rely on their counsel to communicate with SEC staff effectively.

What Happens After the SEC Examination Process?

What happens after an SEC examination depends on what happens during the process. If an examination results in the issuance of a “no findings” letter, then no further action may be necessary, in which case the company should evaluate their compliance program. However, remedial action will be required in some cases; and, if an examination leads to a federal securities fraud investigation, avoiding civil or criminal penalties will require an effective defense.

Can (and Should) Targeted Entities Engage Defense Counsel for SEC Examinations?

Yes, effective legal representation is critical during the SEC examination process. These are high-risk matters that require an informed and strategic defense. At Oberheiden P.C., we have extensive experience representing entities in SEC enforcement matters, and we rely on this experience to achieve favorable results while preserving (or establishing) good working relationships between the SEC and our clients.

Is Your Company or Firm Facing an SEC Examination? Contact Us for More Information

If you would like to know more about our SEC practice, we invite you to get in touch. Please call 888-680-1745 or contact us online to schedule a complimentary consultation at Oberheiden P.C.