The Securities and Exchange Commission's examination process is broken — always has been and unfortunately continues to be. How much I would like to fix it. Alas, it appears that Hillary Clinton will be the next president, and I again will be on the wrong side of the equation. If the SEC had commissioners who truly had a '40 Act background, it would not be hard to improve the current exam process. Here are a few examples:
Stop sending in the kids. Examiners who have little to no understanding of the investment advisory business are learning on the job. Look, I know we all need to start somewhere, but inexperienced examiners make for a prolonged and painful exercise for the examined, with repetitive questions, duplicative document productions, and explaining common industry practices and terminology to the examiner. On two separate exams by two separate regional offices, my clients were asked to explain what the initials UTMA and JTWOS stood for.
Ease up on overly aggressive examiners. Examiners forget they are a guest in your house. They are not there by subpoena. They deserve to be treated with hospitality and respect, but that is a two-way street — they must treat you with respect, too. The SEC has the right to ask for information and you have the obligation to produce it in a timely manner — but timely does not mean 20 minutes. Timely means within a day. Hopefully, you are prepared for the examination and can produce all reasonably requested information much quicker than that.
Stop the prosecutorial tactics. Examiners sometimes make assumptions about how firms run their practices. That is, if you do X, then you must be guilty of Y. I appreciate and respect that the SEC chair is a former prosecutor and that many young lawyers have been hired by the commission (most with little real-life experience, not to mention no substantive investment-related knowledge), and that this administration does not respect the value that the advisory community brings, thinking that all investors can go it alone at Vanguard at 20 basis points. However, save for extremely highly publicized isolated incidents, advisory firms and their employees are not criminals and do not engage in inappropriate activity. They should not be presumed to have engaged in (or have the desire or propensity to engage in) inappropriate activity unless the commission can demonstrate such to the contrary.
Identify an end date for the exam process. Examiners sometimes spend weeks in an advisor's office and continue to make requests thereafter. When does the process end? Shouldn't an advisor have a reasonable expectation of a conclusion within a reasonable period of time? What happened to the 180-day commitment? It appears to mean 180 days after the commission has ceased asking questions. Why is the process taking so long? Are too many examiners starting new exams before completing their prior exams? Don't advisors deserve the respect of contact from the commission as to when a deficiency letter can be expected?
