What an examination
is actually testing.

Firms prepare as though it tests whether they did anything wrong. It mostly tests whether they can demonstrate what they did.

What an examination is actually testing

Firms prepare for an examination as though it were a test of whether they did anything wrong. It is mostly a test of whether they can demonstrate what they did.

Those are different problems. A firm with excellent judgement and poor records fares worse than a firm with ordinary judgement and complete ones, and principals consistently find that surprising.

The request list arrives fast

Expect a document request covering a defined period, typically wanting: your compliance manual and code of ethics, the annual review, advertisements and their substantiation, client agreements, a trade blotter, billing records tied to the agreements, personal trading reports, the books and records list, business continuity plan, and evidence of vendor oversight.

Most of that should be producible in days. Where firms lose time is billing tied back to agreements, and advertising substantiation — because both live across systems and neither was assembled with this request in mind.

The four findings that recur

Fees that do not match the agreement. The single most common category. A schedule amended verbally, a household not grouped, a proration done by hand. It is arithmetic, it is checkable, and it is the easiest thing in the world for an examiner to test.

Advertising that cannot be substantiated. Performance figures on a website, in a deck, or in an email that nobody can trace back to books and records at the time they were published.

A compliance manual describing a different firm. Bought as a template, never adapted, describing procedures the firm does not follow. Having a manual you do not follow is worse than the finding it was meant to prevent.

The annual review that did not happen. Or happened and was not documented, which is indistinguishable from the outside.

What to do a year ahead, not a week

Reconcile your billing to your client agreements — every one, not a sample. Assemble the substantiation for every performance figure you have published anywhere. Read your compliance manual and change the parts that describe a firm you are not. Document the annual review as it happens rather than reconstructing it.

None of that is difficult. All of it is tedious, and tedium is why it is left undone.

During the examination

Answer what is asked. Do not volunteer, do not speculate, and do not guess at a number you can check. Designate one person to handle communication so answers are consistent. Keep a log of every request and what you provided.

If you find a problem while preparing, fix it and document both the problem and the fix. A self-identified and remediated issue reads very differently from one the examiner found.

The structural version of the problem

Almost every difficult request in an examination is difficult for the same reason: the evidence spans systems that do not share a record, so producing it means reconciling before you can answer.

Firms where billing, reporting and the book come from one place answer these requests in hours. Firms running five systems answer them in weeks, and the delay itself shapes the examiner's impression.