Preparation is the root of success, especially when it comes to compliance and the tools you use to pass your next audit. In 2014, the SEC announced an initiative to audit at least a quarter of never-before-audited RIAs over a two-year period. No one wants to be the focus of an RIA audit, but according to the SEC, chances are 100% that it will happen to you eventually, if it hasn’t already. And since it’s no longer a matter of if your firm will be audited, but when, it’s best for you to be prepared.
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When you receive notice from the SEC or your state regulators that you will be audited, you typically have two weeks before they show up at your door. That’s two weeks to make sure your records and documentation are in order, on top of normal work hours and all the tasks required to keep your business running.
If you’re being audited for cause, usually because someone has reported your firm for wrongdoing, you may not even get those two weeks.
The possibility of an audit can keep you up at night, but you can sleep better knowing you’ve prepared as much as possible for that eventuality. Here are a few steps you can take now.
1) Prepare documents in advance.
SEC or state auditors will ask for specific documents, either in the audit letter or when they show up. These include, among others: financial statements, a list of personnel along with their titles and responsibilities, valuation of assets, and disaster recovery plan. The law firm Pepper Hamilton LLP has a list of often-requested documents in their downloadable audit survival guide.
Make sure these documents are complete and accessible. Task your CCO and yourself with reviewing and updating them regularly.
2) Stay informed.
You and your CCO are responsible for staying up to date with RIA compliance rules. Lack of knowledge can hurt you in an audit, and two weeks before examiners hit your door is not the time for a crash course. Devote the time you need to continuing education and best practices. Ensure that your CCO has the flexibility to learn as well, so your office is always operating under the most current information.
3) Schedule self-audits, then follow through.
Audit your own firm on an established schedule. You may catch something in these test runs that you can then correct prior to the real audit. Find self-audit kits and checklists online, or you take a cue from the SEC’s 2016 focus areas to get started. Take this opportunity to prepare your employees for the atmosphere of an audit. Conduct mock interviews, ask that all office conversation be kept professional during the audit, and give feedback on your staff’s behavior when the audit is complete.
4) Document everything.
It’s likely that in the course of your self-examinations you’ll find that your firm is out of compliance in some way. Don’t just fix this instance and move on. Document it, describe what you did to fix it, and create a written plan for preventing future occurrences. This will show auditors that you have what’s known as a culture of compliance at your RIA firm.
5) Develop a culture of compliance.
Establish an office environment where day-to-day operations do not paint the SEC, state regulators, or RIA compliance in general as a burden to be avoided. Cultures of compliance value honesty and improving best practices. Firms that operate with a culture of compliance acknowledge that the rules exist to protect everyone: clients, RIAs, and their employees. Lead by example in your firm by tackling RIA compliance head-on. Be diligent and proactive.
While following these steps won’t take all the stress out of an audit, it will help put your mind at ease on a daily basis.
If you’re worried about audit prep, consider investing in an RIA compliance solution like Smart RIA. Our software will keep you audit-ready and alert you to deficiencies as soon as they happen. Click the button below to schedule a demo.