When Should an RIA Consider a Mock Examination?
VIGILANT INSIGHTS
Introduction
For SEC Registered Investment Advisers (RIAs), regulatory compliance isn’t just a box to check, it’s an ongoing responsibility that can significantly impact your firm’s reputation, operations, and longevity.
One of the most effective ways to assess your readiness and reduce the risk of regulatory deficiencies is through a Mock Examination. But when should your Firm start considering one?
Below are key milestones and risk indicators that suggest it’s time for an RIA to consider scheduling a Mock Exam.
Key Scenarios for Scheduling a Mock Examination for SEC Compliance
1. Newly Registered with the SEC
If your Firm has recently transitioned from State to SEC registration, transitioned from an Exempt Reporting Adviser (ERA) to the SEC or is a newly registered RIA altogether, you’re in the SEC’s “new registrant” window.
The SEC typically conducts an examination within the first 12 to 18 months of registration (sometimes earlier than that).
A Mock Exam during this time:
- Helps prepare for the inevitable initial exam.
- Identifies early gaps in policies, procedures, and disclosures.
- Builds internal confidence in handling real regulator inquiries.
Ideal timing: Within 2 to 8 months of becoming SEC-registered.
2. Material Changes to Your Business
Significant business events can alter your risk profile and compliance needs. Examples include:
- Launching new products or services (e.g., Private Funds, Registered Funds).
- Significant growth in AUM or client base.
- Organizational changes such as mergers, acquisitions, or key personnel turnover.
A Mock Exam helps ensure your compliance program has adapted to your evolving business model and remains aligned with regulatory expectations.
3. Prior Examination Deficiencies or SEC Findings
If your Firm has undergone a previous SEC Exam and received a lengthy deficiency letter, a Mock Exam can serve as a proactive health check. It demonstrates to regulators that you are taking remediation seriously and have improved internal controls.
Tip: Conduct a mock exam before your expected re-examination period (often 3–5 years post-deficiency, or if the deficiency letter was significant 1-2 years post-deficiency is also a strong consideration).
4. Time Since Last Internal Review or Mock Exam
Even if you’ve had no major changes, the SEC expects annual reviews of your policies and procedures under Rule 206(4)-7. A Mock Exam can supplement this requirement and help ensure you’re not overlooking new regulatory risks or market developments.
Best practice: Schedule a mock exam every 2–3 years as part of a robust compliance program.
5. Upcoming SEC Examination Anticipated
If you’ve received notice of an impending exam or believe you’re due for one (based on your risk profile or time since the last inspection), a Mock Exam can help simulate the real experience. It allows your team to receive the latest SEC like Request Letter from Vigilant that is tailored to your business, practice document production, interview prep, and response strategies under realistic conditions.
6. Marketing Rule Compliance Overhaul
The SEC’s Marketing Rule (Rule 206(4)-1) is still a major exam focus. If your Firm:
- Recently updated performance reporting
- Started using testimonials, endorsements, or social media
- Is unclear about what triggers “advertisements”
Then a Mock Exam can assess marketing policies and documentation practices for compliance with the new Rule.
7. Complex Investment Activities or SEC Focus Areas
A. International Client Exposure or Cross-Border Activities
Serving non-U.S. clients or operating across jurisdictions introduces complex issues like:
- Custody rule interpretations
- Foreign account tax compliance (FATCA)
- Recordkeeping challenges
- Regulatory overlap
B. Fee Structures That Could Raise Red Flags
Innovative or customized fee models—such as performance-based fees, tiered billing, or digital advisor pricing—may lead to examination scrutiny.
Mock reviews can help you:
- Validate billing practices
- Confirm fee disclosures align with Form ADV
- Avoid overbilling or inconsistent client agreements
C. Conflicts of Interest or Significant Transactions with Affiliates
The SEC closely monitors risks related to conflicts of interest and transactions with affiliates. Firms should disclose material related-party transactions to ensure transparency and protect investors from potential self-dealing or preferential treatment.
Mock reviews can help reduce the risk of conflicts of interest by the following:
- Identifies Weaknesses in Policies and Procedures: It reveals gaps or inconsistencies in a firm’s conflict-of-interest policies, allowing firms to strengthen controls before a real SEC examination.
- Enhances Employee Awareness and Compliance: Through exam simulations, employees become more aware of conflict-of-interest scenarios and how to handle them, improving overall adherence to ethical standards.
- Tests Documentation and Disclosure Practices: The mock exam assesses whether related-party transactions and potential conflicts are properly documented and disclosed, reducing the risk of regulatory violations.
Conclusion: Strategic Importance and Mock Exam Benefits
Mock Examinations are no longer reserved for Firms in trouble, rather they are a strategic tool for proactive risk management.
The best time to consider one is before the SEC calls, not after. Whether you’re newly registered, undergoing rapid growth, or simply aiming to stay ahead of regulatory expectations, a Mock Exam can provide clarity, confidence, and compliance peace of mind.
Vigilant provides a customized and tailored request list during the initial phases of the Mock Exam and allows for assistance of remediation for any of the findings thereafter the Mock Exam is completed.
To learn more about our Mock Exam Services and the overall process, contact Vigilant today to learn more about how we can help.