Don't Wait! Get Ahead of SEC Scrutiny With Mock Examinations

Taken together, this heightened regulatory focus combined with emerging new areas of exposure could challenge the compliance capacity of advisors and make strong compliance policies and procedures more important than ever.

Mock Exams Make Sense

Many advisor firms are turning to mock examinations as a key tool to enhance their SEC compliance programs. Mock exams draw on the experience of RIA firms’ chief compliance officers and/or third-party consultants, many of whom are former SEC staff members. These experts employ compliance testing methodologies focused on SEC Risk Alert topics and areas addressed in similar exams of peer advisor firms, making mock exams highly effective at identifying and mitigating compliance risks.

For RIAs that have not yet done a mock exam, it is often because they lack the resources or perceive the potential return on investment as insignificant. Yet the case for conducting them has never been more compelling.

In an effort to reduce potential claims under advisors’ Errors and Omissions insurance coverage, several insurers, including Chubb, reimburse a portion of the cost of mock exams provided by third-party consultants, where permitted by law. The resulting net cost of the mock exam can be less than or comparable to many E&O insurance deductibles, which are paid out of pocket by an advisor at the time of a claim.

An actual SEC exam that yields findings worthy of a full investigation and potential enforcement actions can produce major financial impacts, as defense expenses can run into millions of dollars. The reputational damage can be even more concerning for RIAs, resulting in potential loss of client confidence that could lead to asset redemptions.

While not guaranteed, addressing compliance weaknesses identified in a mock exam could help keep an SEC exam from escalating to a full-blown investigation, which could trigger an E&O insurance claim and deductible, and further enforcement action.

With the increasing number and scope of SEC exams, combined with the potential severe financial and reputational damages from a formal SEC investigation, it makes good bottom-line sense for RIAs to take a proactive approach with mock exams to help prevent these impacts.

Steven F. Goldman is president of Chubb’s North America Financial Lines division. He can be reached at [email protected].