Performing effective due diligence when you are part of a small or resource constrained organization can be really tough for even the most seasoned due diligence professional. One place we can turn for inspiration are the examinations performed by the SEC, which is the subject of our past webinar “How Understanding SEC Examinations Can Inform the Due Diligence Process”.
There are two major areas that you can leverage to ensure you don’t need a huge team to perform effective operational due diligence: Firstly, the focus areas identified by the SEC that they use to structure the current year’s examinations; and secondly, the actual techniques they use to structure and conduct those examinations.
Use SEC focus areas to focus your due diligence investigation
Your firm might have any number of relationships with investment advisers and third parties. So, how do you focus and structure your due diligence investigations so you make the most of your time and have a due diligence process that works regardless of your team size?
One way is to use SEC examination focus areas for the current year as a basic structure for your investigations. These topics have been selected by the SEC based on their observations of current trends, so they give you a good steer as to the likely areas of highest risk to investigate. You’ll want to update your due diligence process every year to encompass that year’s SEC priorities.
2018’s focus areas are:
- Retail investors, including seniors and people saving for retirement
- Compliance and risks in critical market infrastructure
- The Financial Industry Regulatory Authority (“FINRA”) and Municipal Securities Rulemaking Board (“MSRB”)
- Anti-money laundering programs
How to use these areas to save time and make best use of a smaller team in your due diligence investigations:
- Be aware of changing SEC focus areas and determine if those are higher risk areas for your organization.
- When performing due diligence ask the firm you are investigating what they are doing in response to SEC focus areas.
- Consider managing your reviews using similar points
- Don’t disregard your own insight and rely solely on SEC focus areas.
Use SEC techniques when investigating
As well as paying close attention to the areas the SEC deems most important to focus on in its investigations, you can use the same techniques their examiners do when investigating and interviewing during your due diligence process.
These techniques are designed to get you closer to the truth and give you a more accurate picture of risk more quickly, which in turn reduces the need for such a large team of due diligence professionals to do the job. Here are some tips:
- Use a risk scoring model to determine the depth of your investigations into a particular firm. This means you don’t have to look under every stone and you have a neat set process for identifying the areas you cannot afford to overlook.
- Gather as much information as you can prior to making contact, so you’ve analyzed it before you speak to the organization directly. This ensures your interviews are as focused as possible and reduces the need for repeat contact with the same individual as new facts emerge.
- Give the organizations you’re investigating enough lead time to provide documents before your site visit. This will ensure maximum cooperation from the firm in question and reduce the amount of time you have to spend chasing information or the time your team has to spend organizing it.
- When on site, test knowledge of regulatory concepts, policies, procedures. These simple questions will quickly build an accurate picture as to the firm’s attitude to risk and the reality of how it is managed.
- Some more pointers for time-effective interviewing on site include:
- Ask broad, open ended questions
- Evaluate body language as well as the content of the response
- Ask the same question of multiple people
- Play dumb, or if there are two of you consider the good cop/bad cop routine
Find out more about what the SEC does during its examinations and how you can apply that in your own due diligence training. Access the webinar recording and slides by clicking the image below and get the full picture on how you can best use a small team to make your next due diligence investigation more effective.