SEC Division of Examinations Releases New Exam Handbook

Published on the first day of the SEC’s 2027 fiscal year, the handbook follows an examination from start to finish. It traces the path a registrant, including an SEC-registered investment adviser, can expect to take, beginning with how the SEC selects registrants to examine and ending when the examination closes. The handbook describes the conduct the Division’s staff expects from a registrant under examination and outlines commitments of the staff to registrants in return. By its terms, the handbook reflects the views of the staff and should not be considered a new rule or regulation codified by the SEC or an official statement of the agency. Nonetheless, registrants that understand the handbook and its practical implications could avoid or mitigate common missteps in the examination process.

Background

Until now, the Division staff’s main explanation of the examination process was a brief brochure sent to a registrant along with a letter notifying such registrant of an upcoming examination. Other than the 2023 brochure, registrants had to rely on prior exam experiences alongside public statements, annual examination priorities, and informal guidance issued by the SEC to gain a greater sense of how an examination is likely to be conducted. To boost the transparency and consistency of exams, the handbook goes well beyond that brochure and features a roadmap of the examination process with a step-by-step discussion of each phase and a chart of important deadlines, among other items relevant to registrants. 

The Division describes the handbook as part of the staff’s effort to approach each examination with “an accessible and collaborative mindset, not an adversarial one.” This emphasis on openness is consistent with the SEC’s broader push for greater transparency in line with SEC Chairman Paul S. Atkins’ prior comments that examinations “should not be a ‘gotcha’ exercise.”

Key Guidance for Registrants

In the handbook, the Division addresses the following.

Candidate Selection and Scoping: The handbook confirms that candidates are selected on a risk basis and provides certain factors that the staff will consider when conducting risk assessments, such as:

• Prior examination history.
• Disciplinary history of associated individuals or affiliates.
• Tips, complaints, or referrals involving the registrant.
• The length of time since registration or the last examination.
• The registrant’s client or customer base.
• Business activities that may create conflicts of interest.
• Material changes in the registrant’s leadership or key personnel.
• Indications that the registrant may be vulnerable to financial or market stresses.
• Reporting by news and media that may involve or impact the registrant.

The reason for any particular exam is non-public, and the staff typically does not share it. The handbook also states that being selected is not, in itself, a sign that something is wrong. During pre-examination planning, the staff may use a registrant’s public filings and websites to shape the initial scope of an examination, and current and accurate filings are likely to make any examination more efficient.

Exam Announcement and Staffing: Most exams begin with a short call to the registrant’s chief compliance officer (CCO) or another regulatory contact. The handbook encourages registrants to provide the staff an overview of any other regulatory inquiries that could slow the registrant’s responses. When the facts allow, the staff will try to accommodate scheduling needs and will look to minimize overlap with other ongoing exams or investigations. 

At a minimum, an exam team usually includes one or more examiners, an exam manager, and an assistant director. Occasionally senior members of the Division, which is not an indication that the SEC has heightened concerns, or staff from other SEC divisions and offices may participate in examinations for various reasons, such as providing subject-matter expertise.

Information Requests and Document Production: The handbook stops short of offering a model initial request list. However, appended to the 2023 Scoping Risk Alert published by the SEC is a list of materials the staff routinely seeks from registered investment advisers of every kind when an examination opens. Read alongside the handbook, that appendix is a useful benchmark registrants can use to organize their books and records before the staff makes contact. A registrant that holds back responsive material on privilege grounds is expected to furnish a log that itemizes every document kept from the staff and supplies enough detail for the staff to test the basis for the assertion.

Interviews and On-Site Visits: The staff may start with an initial interview of the CCO or other key personnel to learn about the registrant’s business and help set the exam’s scope. The handbook provides that making knowledgeable, well-prepared personnel available leads to more productive meetings and may mean fewer of them. An examination may also include an on-site visit with the registrant, which can involve an office tour to observe workflow and the control environment. Registrants are encouraged to raise any misunderstanding by the staff of their business, policies, and practices as soon as possible.

Confidentiality: Information the staff obtains during an exam is presumed confidential and non-public unless disclosure is specifically authorized. The Division also typically does not disclose publicly whether a registrant is under examination or what the exam found. The Division staff may share exam information with other SEC staff and with other regulators or authorities, and it does not disclose whether it has done so. 

Key Deadlines and Outcomes: Once interviews and analysis are complete, the staff typically holds an exit conference to go over any issues it has identified. The conference gives the registrant a chance to correct inaccuracies, add information, and describe corrective actions it has taken or plans to take. Registrants should expect to receive a disposition letter from the Division within 180 days after the later of (1) the completion of the on-site portion of the exam and (2) the staff’s receipt of all requested records. The letter will report one of three outcomes: (1) the exam has concluded, (2) the exam has concluded without findings, or (3) the staff requests corrective action through the issuance of a deficiency letter. No response is expected by the staff for the first two outcomes.

A deficiency letter will not prescribe a specific remedy beyond compliance with applicable law. Registrants are typically asked to respond within 30 days and should ask for any extension, if needed, as early as possible. The staff will attempt to provide any further comments within 60 days of the registrant’s response, and the absence of staff comments does not mean the staff agrees with the positions the registrant has taken.

Feedback and Escalation: Most questions and concerns can be resolved with the registrant’s exam team or its supervisors. Issues that remain unresolved, along with general feedback, can be raised through the Examination Hotline (202-551-EXAM; examhotline@SEC.gov). The Hotline is staffed by the Division’s Office of Chief Counsel, and callers may remain anonymous.

Reciprocal Expectations: The handbook’s “Working Together” table sets out what each side should expect from the other during the examination process. In return for registrants’ providing knowledgeable personnel and designated points of contact, transparency about known compliance issues, and prompt responses or timely extension requests, among other items, the Division commits to providing a courteous, well-prepared staff, tailored requests with reasonable deadlines, coordination with other regulators to reduce overlap, and to safeguard registrant information, in addition to other registrant-favorable commitments. These expectations are aimed at promoting efficiency in the examination process and minimizing the temporal demands an examination places on a registrant’s personnel. 

Practical Takeaways

While the handbook imposes no new substantive requirements on registered investment advisers, it does give the staff a public benchmark for judging how well prepared a registrant is going into an examination and how it behaves once the examination begins. In return, the handbook gives registrants a much clearer basis to hold the Division to its own commitments and should provide a useful tool to improve internal compliance programs ahead of, rather than during, a registrant’s next examination.

ArentFox Schiff Corporate & Securities attorneys are available to answer your questions, including the implications of the handbook for investment advisers advising private fund clients. Please contact the authors of this alert or your ArentFox Schiff attorney contact for more information.