If you haven’t planned for an SEC audit, you should.
Why? Because you are likely to face one. Advances in technology and the adoption of a data-centric approach have made it fast and easy for the SEC to comprehensively audit even the smallest firm, regardless of its location.
The SEC’s 2021 Examination Priorities report states that it will continue to conduct examinations of RIAs that have never been examined, including new RIAs,
The division’s efforts are paying off. In 2020, it completed 2,952 examinations and audited 15% of RIAs, up from 10% in 2014. These numbers are significant because they illustrate the shift in the SEC’s approach. Essentially, it has transitioned from a limited number of labor-intensive, data-sampling audits to an approach that is more comprehensive (in terms of the number of RIAs assessed) and more automated.
Firm size doesn’t matter, data access does
In preparing for a potential audit, the management team and the chief compliance officer should sit down to talk through each step of the process. Arguably, the most important issue to consider is data access. The audit process goes significantly smoother if all involved can easily access clean data from a single source.
As the SEC’s auditing process has become more automated, technology has also come to play a major role in how firms respond to an audit. Gone are the days of requiring the staff to pull an all-nighter, collecting and organizing paper files to be presented to an auditor in the morning. Modern RIA firms use sophisticated wealth management platforms, enabling staff members to simply pull reports and access data that is readily available.
Having robust software on both sides of the equation is in everyone’s best interest. Firms that provide auditors with clean data sets can significantly reduce time-consuming back and forth with the SEC, whose follow-up questions can seem endless when data is incomplete or inconsistent.
RIA’s first audit
It is important to remember that robust wealth management tools are not just for the largest financial advisory firms. Here’s one example: In mid-2020, the SEC contacted a small firm with three employees serving 50 clients across 125 accounts for its first audit. The firm had $105 million in AUM.
The process started with an initial phone interview followed by multiple rounds of follow-up questions. The firm already used our platform for portfolio accounting and during the period when the SEC was going back and forth with the firm multiple times per week the staff told us they were able to quickly respond to inquiries passed along from the auditors, often providing responses within minutes — at the latest by the end of the day.
By being able to quickly locate and export data, in the format the SEC requested, the firm was able to conduct daily business while also juggling the active audit with almost no disruption to client service. Additionally, stress on the team was minimized, and less stress combined with increased automation and ease of data access meant errors were minimized, all helping ensure a smoother process and faster resolution.
Firms that are well-positioned with their data will be able to confidently handle audits and compliance questions when they pop up — one less thing they will have to worry about in 2022 and beyond.
