In line with our new tag line, “Don’t be a Target”, FinServ would like to provide some insight we have gained from our clients who have had the unfortunate experience to go through an SEC Audit. In many conversations we have had with our clients over the past year the concern of an audit has been on the top of many of their minds. Many have gone thru mock exams or SAS 70 Type II testing. Here is what we hope is a list of helpful hints if you have to go through this process.

  1. Resist the Temptation to Educate the Audit Staff – The auditing staff just like any audit team will undoubtedly be staffed by a group of very junior inexperience yet intelligent team of staffers. However you should resist the maternal or paternal instinct to educate these individuals. Remember they have a job to do which is to uncover issues in your financials or trade history. You should answer specific questions that the staff has about the information you provide them but resist elaborating or providing lectures on various tangential topics.
  2. Educate your Employees – A large part of the audit will focus on your policy and procedures and whether the team actually follows them. It is critical that in advance of the audit you ensure that your policy and procedures are up to date and that all employees have reviewed them and are familiar with the policies and procedures that apply to their area.
  3. Accept the fact that they will be with you for a while – You should avoid trying to take steps to attempt to rush the auditors. You must remember first and foremost that these workers likely have no specific deadline for finishing your audit and they are not overly motivated to work extra hours so expect them to work 9 to 5 each day and be with you for a while. The best tact you can take to getting them out as quickly as possible is to provide the information they request in a quick and well organized manner. Again only providing exactly what they ask for. Having systems that can provide custom reports is critical so you are not spending hours on end attempting to modify excel files. Reports that come from a specific data source will appear much more reliable than you providing them with excel files as well.
  4. Plan now for a major drain on your key staff members – If you don’t have a fully automated set of systems that can produce all the possible requests at a moment’s notice (and very few people do) you need to plan ahead so you can keep the lights on with your critical operations as the auditors drain your teams time.
  5. Be Well Prepared – When you receive the notice that you will be audited you should be as prepared as possible for the team arrival. Hopefully you have the systems in place to produce the data they are most likely going to request (especially a strong portfolio management system). However if you don’t the best thing to do is start dedicating your internal team’s time to getting this data well organized and together as quickly as possible. No one ever said I wish I wasn’t so prepared, but plenty of people have said I wish I was more prepared.
  6. Don’t give them a closet to work in – Avoid the temptation to try to place your auditors in the most uncomfortable location possible. While this may seem like a great idea and you may think this will motivate them to leave as soon as possible. The reality is as noted before they are with you for a specific purpose and cannot leave before that job is done. Providing them with

In addition we are linking a sample SEC Exam Documentation Request List to give you an idea of what they will be asking for some highlights our clients mentioned include:

  1. Trade Data
  2. Operational Data – Valuation & Supporting Workpapers
  3. Reconciliations & Controls
  4. Separation of Functions
  5. Independence from your third party administrator (TPA)
  6. Brokerage Data
  7. Proof of Best Execution
  8. Client Info (Value added, conflicts)
  9. Corporate Record
  10. List of Service Providers Paid
  11. Confidential Agreement with Service providers
  12. Political Donations

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