SEC Division of Examinations Defense
Defense Counsel for Investment Advisers, Broker-Dealers and Other Market Participants Facing Scrutiny from the SEC Division of Examinations
The Securities and Exchange Commission (SEC) Division of Examinations conducts on-site exams to assess registrants’ compliance with federal securities laws and regulations. These on-site exams can pose significant risks for registrants that are not thoroughly prepared. From established registered investment companies to newly launched private funds, we defend a wide range of clients during (and after) the on-site exam process.
SEC Compliance Team Lead
Former DOJ Trial Attorney
Contact JohnThe Division of Examinations is responsible for administering the SEC’s national exam program. It has oversight of all SEC-registered entities and individuals, and it conducts on-site exams to ensure compliance, preserve market integrity, and facilitate civil and criminal enforcement actions when warranted.
Our firm represents all types of market participants during SEC examinations. When conducting examinations, the Division’s focus is on assessing the efficacy of market participants’ compliance efforts. Throughout the examination process, the division remains focused on assessing compliance—and any compliance challenges or failures uncovered during the process can lead to further action, including potentially a referral to the SEC Division of Enforcement or the US Department of Justice (DOJ).
What to Expect During the Examination Process
With this in mind, it is critical for market participants to know what they can expect during the SEC examination process. This is true for all market participants that are subject to the Division of Examinations’ oversight, including (but not limited to):
- Clearing agencies
- Companies that provide automated investment advisory services and alternative trading systems
- Exchange traded funds (ETFs) and mutual funds
- Investment advisers, municipal advisors, private fund advisers, and broker-dealers
- National securities exchanges
- Security-based swap dealers
- Self-regulatory organizations (SROs)
From liquidity risk management controls and other portfolio management practices to operational resiliency and identity theft prevention, the SEC Division of Examination thoroughly assesses all aspects of market participants’ compliance efforts. In broad strokes, its process involves:
1. Thorough Review of Market Participants’ Compliance Programs
On-site exams typically begin with a thorough review of market participants’ compliance programs. While examiners take a broad-based approach, they often pay particular attention to operational and compliance challenges that pose particular risks for individual investors. This includes (but is not limited to) compliance with the SEC’s:
- Net Capital Rule and Customer Protection Rule
- Regulation Identity Theft (Regulation I-D)
- Regulation Safeguarding and Privacy (Regulation S-P)
- Regulation Systems Compliance and Integrity (Regulation SCI)
This is just a small sampling. The examination program is extremely broad, and from newly registered funds and recently registered advisors to established institutions that provide private credit, all market participants must be prepared to withstand the Division’s initial risk assessment. If they aren’t, this can lead to even greater scrutiny and increase their risk of facing enforcement action.
2. Assessment of Market Participants’ Use of Emerging Financial Technologies
Increasingly, the Division of Examinations is payment particular attention to market participants’ use of emerging financial technologies. This includes technologies used to assess market volatility and counterparty credit risks, as well as technologies used to inform investment advice and investment strategy recommendations related to alternative investments.
3. Assessment of Market Participants’ Use of Artificial Intelligence
When assessing market participants’ compliance programs (including advisory firms’ and advisers’ compliance programs), the Division of Examination also pays particular attention to their use of artificial intelligence (AI). Relying on AI does not relieve market participants of their fiduciary obligations, and overreliance on AI—particularly with regard to fixed income trading practices and advisers’ fiduciary duties—is a growing concern.
4. Determination of Compliance
From marketing materials and retail sales practices to cash sweep programs and incident response programs, after conducting its assessment, the Division of Examinations will make a comprehensive determination of compliance. While exposure to less-liquid assets, advising separately managed accounts, excessive fund fees, and other investor risks are often of particular concern, the Division’s continued focus remains on thoroughly assessing all aspects of market participants’ compliance programs.
5. Determination of Next Steps
After making a determination of compliance, the Division of Examinations will typically conduct a preliminary exit conference, and then it will determine appropriate next steps. Depending on its findings, these may include:
- Confirmation of compliance
- Settlement and remediation (i.e., preparing incident response programs)
- Administrative enforcement action
- Referral to the SEC Division of Enforcement
- Referral to the US Department of Justice (DOJ)
While recently registered advisors and those that have not previously advised private funds may be at particular risk of committing compliance oversights, all market participants can—and do—make mistakes. As a result, when facing scrutiny from the Division of Examinations, it is critical not to make assumptions, but instead to make informed and strategic decisions based on the advice of counsel.
Current Examination Priorities
The SEC Division of Examinations currently has several examination priorities. Identified in 2026, the SEC’s current priorities emphasize investment advisers’ fiduciary duties, as well as using quantitative data analysis to identify high-risk firms. The SEC is also prioritizing examinations for firms that have never been subjected to on-site exams in the past.
The Division’s current examination priorities include:
Fiduciary Duties and Standards of Conduct
Investment advisers owe various fiduciary duties to their clients, including the duties of care and loyalty. Advisers and other market participants are also subject to various other standards of conduct. The SEC Division of Examinations emphasizes management of fiduciary duties and standards of conduct through effective compliance programs.
Artificial Intelligence and Other Emerging Technologies
As discussed above, artificial intelligence and other emerging technologies are priority enforcement areas for the Division of Examinations as well. Misuse of these technologies, or use without adequate safeguards, can expose investors to risks and expose market participants to enforcement liability.
Cybersecurity
The SEC’s on-site examinations typically involve a thorough assessment of compliance with Regulation S-ID and S-P. The SEC emphasizes governance structures for cybersecurity in its examinations; and, here too, being prepared to affirmatively demonstrate a robust and good-faith commitment to compliance is key. The SEC will typically evaluate firms’ preparedness for any impending Regulation S-ID and Regulation S-P amendments as well.
Anti-Money Laundering (AML) Compliance
Anti-money laundering (AML) compliance is a longstanding enforcement priority for the SEC. All market participants need to give due consideration to AML compliance, and they must be prepared to demonstrate their AML compliance efforts to the Division of Examinations when necessary.
FAQs: Defending Against an On-Site Exam from the SEC Division of Examinations
Why is the SEC Division of Examinations conducting an on-site exam of my firm or business?
The SEC Division of Examinations conducts on-site exams of registrants as a matter of course. While some on-site exams are targeted, many are based on random selection or the Division’s focus on examining registrants it has not examined previously.
What should investment firms, clearing agencies, and other registrants do when facing an on-site exam?
On-site examinations may be announced or unannounced, and whether a registrant has advance notice of an examination will play a key role in determining how the registrant responds. Broadly, however, when facing an on-site exam, registrants should:
- Implement a legal hold to preserve all relevant records;
- Work with their legal counsel to conduct a privileged compliance and risk assessment;
- Formulate a response strategy that is tailored to the circumstances at hand.
These preliminary steps are essential for executing an informed and sound defense.
Without a clear and comprehensive understanding of the risks at hand, registrants will not be prepared to defend themselves effectively.
What are some of the key compliance dates for SEC registrants?
Different types of SEC registrants have different compliance obligations; and, as a result, their compliance deadlines vary. If you have questions about your firm’s or business’s SEC compliance deadlines, we recommend consulting with an experienced SEC compliance attorney promptly.
Yes, violations of FINRA rules can lead to enforcement action by the SEC. FINRA’s rules and the SEC’s regulations overlap in many respects; and, as a result, conduct that violates FINRA’s rules will often violate registrants’ federal obligations as well (or vice versa).
Do I need to engage legal counsel for an SEC Division of Examinations on-site exam?
Due to the complexity of the process, the complexity of registrants’ compliance obligations, and the risks involved in facing scrutiny from the SEC, we strongly recommend engaging legal counsel for an on-site exam. If your firm or business is facing an on-site exam, our attorneys can help you prepare, and we communicate with Division of Examinations staff on your behalf throughout the process.
Speak with an SEC Compliance Attorney at Oberheiden PC in Confidence
If you would like to speak with one of our SEC compliance attorneys about an impending on-site exam involving the Division of Examinations, we invite you to get in touch. Call 888-680-1745 or contact us online to arrange a free and confidential consultation.
Related pages:
