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I am happy to say, "I survived an SEC audit"

Tuesday, March 10th, 2015

I have been in the investment business for more than 30 years. I have seen and survived many things, such as the 1987 stock market crash, the 1990 banking crisis, the tech boom and bust, 9/11, the accounting scandals of Enron and WorldCom, and the Great Recession.

Well, I'm also happy to say that I can now add to that list a Securities and Exchange Commission audit.

The job of the SEC is to watch over and regulate investment advisory firms. If an investment advisory firm manages more than $100 million in assets, it is regulated by the SEC.

The SEC does not oversee brokers who work for brokerage firms; brokers are regulated by FINRA. Investment advisory firms are held to a higher standard than brokers. These firms must provide clients the best investment, whereas brokers are required to provide only a suitable investment.

In other words, if you go to a broker and are sold a growth mutual fund, even if it is the worst-performing growth mutual fund, that's OK, if it is suitable for the investor.

However, an investment advisory firm must use the best growth mutual fund for the investor. Investment advisory firms cannot charge upfront commissions or back-in charges. Everything an investment advisory firm does must be either on a fee basis or on a per-hour basis.

It is also worth pointing out that in California, an investment adviser with less than $100 million in assets is regulated by the state.

Here's what an SEC audit is like: When you first receive notification, you get that lump in your throat - the same as when you are notified that the Internal Revenue Service is going to give you a full audit.

I received my notification from the SEC in October and just received an exit interview March 5. I have always looked at audits on my business as an opportunity to make sure I was doing everything right.

The SEC did a great job of being extremely thorough in investigating my firm. I can't tell you how many hours commissioners spent examining all of our records. After the first day, when they had physically looked at files and records and also conducted lengthy interviews with me and my staff, they continued to ask for other documentation and spreadsheets for nearly five months.

They were very polite and nice to work with; however, they were also very business-oriented.

I felt I had nothing to worry about because I always put the clients' interests first and tried to never have any conflicts of interest or any misrepresentation of what I was saying or writing. During the exit interview, they did say that I am in the public eye, which falls under the rules of advertising. I won't go into detail of the rules and regulations of what they found, but I was very happy that it all can be fixed.

To give you one example, my son, Chase, who works for our firm but also goes to school in Arizona, is on our website, which stated that he will join our firm when he graduates in May. Obviously, that was confusing and misleading to those reading our website.

It helps to have a great team that supports my efforts in managing money for our clients, and they all do a great job. While I am ultimately responsible for everything that happens at my firm, I know my staff takes a personal interest in what goes on in the office.

In the past, I have offered a variety of advice on what people should ask the broker or adviser they will be trusting to manage their hard-earned money. I can now add this to the list of questions to ask your broker or adviser: Have you ever been audited by the Securities and Exchange Commission?

While I get no award or letter grade for completing the audit, I am proud that I have continued to provide the best advice I can for my clients and stayed within the guidelines of the regulators for more than 30 years.

Make no mistake: The Securities and Exchange Commission does not approve or disapprove of any firms or securities. Its job is to verify that an investment advisory firm is following the guidelines to not mislead investors.

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