United States: Open (Hand)book for SEC Exams: A Useful Tool for the Uninitiated

By: Pablo J. Man, Neil T. Smith, and Hayley Trahan-Liptak

A call from the Staff at the Division of Examinations (Exams) of the Securities and Exchange Commission (SEC or the Commission) notifying a registrant of an exam has long induced uncertainty and concern, even though exams generally follow a standard playbook. Stating a goal of increased transparency and productivity, the SEC released The SEC Exam Handbook: A Practical Guide on Process and Engagement (the Handbook), which outlines a roadmap for examinations and the Commission’s expectations for registrants. For registrants who have been examined before, there will be no surprises.

The Handbook replaces and expands upon the Division’s prior examination brochure and aims to cover every step of the examination, from identifying the risk-based steps the Staff undertakes to select registrants to examine, through the process for information requests, interviews, and conclusion of the examination. Despite recent shake-ups of processes throughout federal agencies, the Handbook’s roadmap is virtually identical to the process the Exams Staff have employed for years.

The Handbook explains the Exams Staff’s expectations, including timely responses, clear descriptions of the business and compliance operations, organized documents that follow the required guidelines, and a courteous and professional tone. 

One area the Handbook does not clarify is average Exam duration. The Handbook highlights that by law, a disposition letter must be issued within 180 days of on-site examinations, but declines to provide more detailed estimates based on variable examination scopes, business complexity, and information identified during the exams. With the decrease in exam staff and funding, registrants should be prepared for a lengthy exam process. Timely responses can help with that process, but the ultimate conclusion of an exam is in the SEC’s sole control.

While the Handbook emphasizes open dialogue and transparency about known compliance issues, registrants should remember that discussions with Exam Staff are interactions with the regulator. Care should be taken when responding to requests and engaging with Staff, particularly when addressing potential deficiencies or providing information that may broaden the examination’s scope.

Regardless of the SEC’s goal for transparency, registrants may benefit from consulting with counsel before and during an examination.