How to Handle How to Handle Regulatory Regulatory

ExaminationsExaminations  

By: Sylvia M. ScottBy: Sylvia M. Scott

How to Handle Regulatory How to Handle Regulatory ExaminationsExaminations

Attorney Sylvia M. Scott represents Attorney Sylvia M. Scott represents clients in the financial sector as head of clients in the financial sector as head of the Securities Regulation Practice the Securities Regulation Practice Group at Freeman, Freeman & Smiley, Group at Freeman, Freeman & Smiley, LLP, in Los Angeles. In her position, LLP, in Los Angeles. In her position, Scott offers guidance on properly Scott offers guidance on properly responding to audits from the SEC, responding to audits from the SEC, FINRA and other regulatory FINRA and other regulatory organizations. organizations.

How to Handle Regulatory How to Handle Regulatory ExaminationsExaminations

Despite best efforts to comply with the myriad of ever-Despite best efforts to comply with the myriad of ever-changing regulations, financial advisors, broker-dealers and changing regulations, financial advisors, broker-dealers and investment advisers may still find themselves subject to investment advisers may still find themselves subject to intense scrutiny by a regulatory institution such as the SEC, intense scrutiny by a regulatory institution such as the SEC, FINRA or a state regulator. However, thorough preparation FINRA or a state regulator. However, thorough preparation for an examination, for an examination, auditaudit or regulatory inquiry can make or regulatory inquiry can make the process easier by leaving as little as possible to chance. the process easier by leaving as little as possible to chance. Prior to the examiners' arrival, the advisor or broker should Prior to the examiners' arrival, the advisor or broker should review recent rule changes, read earlier letters between the review recent rule changes, read earlier letters between the authority and the organization, and identify the topics on authority and the organization, and identify the topics on which the investigation will focus. which the investigation will focus. 

There a number of best practices that advisers should There a number of best practices that advisers should adopt when faced with a regulatory examination. Below is a adopt when faced with a regulatory examination. Below is a non-exhaustive list of examination “Dos and Don’ts”: non-exhaustive list of examination “Dos and Don’ts”: 

Dos:Dos:

1. Be courteous and reasonably accommodating. 1. Be courteous and reasonably accommodating. 2. Review past deficiency letters. 2. Review past deficiency letters. 3. Familiarize yourself with new regulations that impact 3. Familiarize yourself with new regulations that impact your firm.your firm.4. Review the examination request list, ask the examiner 4. Review the examination request list, ask the examiner for clarification if necessary and flag possible areas of for clarification if necessary and flag possible areas of concern for follow-up.concern for follow-up.5. Designate a reliable point person at your firm to interface 5. Designate a reliable point person at your firm to interface with the examiner.with the examiner.6. Maintain a log of documents requested and produced.6. Maintain a log of documents requested and produced.7. Address and correct any apparent miscommunications. If 7. Address and correct any apparent miscommunications. If there are any contested issues, address them before the there are any contested issues, address them before the fieldwork portion of the exam is concluded.  fieldwork portion of the exam is concluded. 

Don’ts:Don’ts:

1. Do not treat an examination as routine. All exams are now risk-1. Do not treat an examination as routine. All exams are now risk-based. based. 2. Do not “wing it” in responding to an inquiry or submitting to an 2. Do not “wing it” in responding to an inquiry or submitting to an interview. Give thoughtful responses or ask for more time so that interview. Give thoughtful responses or ask for more time so that you can provide a thoughtful and accurate response. Remember, you can provide a thoughtful and accurate response. Remember, everything you say can and will be used against you.everything you say can and will be used against you.3. Do not lie to the regulators. Remember the old maxim, “the 3. Do not lie to the regulators. Remember the old maxim, “the cover-up is often worse than the crime.” cover-up is often worse than the crime.” 4. Do not behave in a manner that gives the examiner the 4. Do not behave in a manner that gives the examiner the impression that you are causing delay or being disrespectful. impression that you are causing delay or being disrespectful. 5. Do not let a deadline on a request letter pass, unless you have 5. Do not let a deadline on a request letter pass, unless you have received an extension. received an extension. 6. Do not turn over any attorney-client privileged communications; 6. Do not turn over any attorney-client privileged communications; be sure these confidential items are removed from any document be sure these confidential items are removed from any document production, including electronically stored information. production, including electronically stored information. 7. Do not volunteer information unless you are absolutely certain 7. Do not volunteer information unless you are absolutely certain it is helpful; err on the side of not volunteering information until it is helpful; err on the side of not volunteering information until after you have had time to carefully consider the matter.  after you have had time to carefully consider the matter. 

How to Handle Regulatory How to Handle Regulatory ExaminationsExaminations

By acting now and adopting the following recommendations, your chances of By acting now and adopting the following recommendations, your chances of becoming an enforcement referral can be dramatically reduced: becoming an enforcement referral can be dramatically reduced: 

1. Make sure your compliance controls and infrastructure are sound, strong and 1. Make sure your compliance controls and infrastructure are sound, strong and tailored to your firm’s business model.tailored to your firm’s business model.2. Follow your own compliance manual, policies and procedures. Sounds obvious, but 2. Follow your own compliance manual, policies and procedures. Sounds obvious, but this is a recurring problem found by examiners and is “low hanging fruit” for this is a recurring problem found by examiners and is “low hanging fruit” for examiners to spot. examiners to spot. 3. Identify weaknesses in your supervisory system. Make sure your firm has a strong 3. Identify weaknesses in your supervisory system. Make sure your firm has a strong supervisory system for, among other things, monitoring insider trading, adequacy of supervisory system for, among other things, monitoring insider trading, adequacy of disclosures, accuracy of valuations, investor communications and all significant areas disclosures, accuracy of valuations, investor communications and all significant areas peculiar to your firm’s business model. peculiar to your firm’s business model. 4. Make sure your written procedures lay out clear and concise procedures regarding 4. Make sure your written procedures lay out clear and concise procedures regarding reporting lines.reporting lines.5. Make sure you have compliance staff that is experienced and that there are 5. Make sure you have compliance staff that is experienced and that there are sufficient resources to get the job done. sufficient resources to get the job done. 6. Training is key, including staying abreast of the ever-changing regulations that 6. Training is key, including staying abreast of the ever-changing regulations that impact your firm’s activities. impact your firm’s activities. 7. Evaluate whether your firm’s technology is adequate to handle the compliance 7. Evaluate whether your firm’s technology is adequate to handle the compliance demands. For example, IT systems inadequate to prevent insider trading will set off demands. For example, IT systems inadequate to prevent insider trading will set off alarm bells for examiners and could be a breeding ground for abuse.  alarm bells for examiners and could be a breeding ground for abuse. 

How to Handle Regulatory How to Handle Regulatory ExaminationsExaminations

Many of these recommendations Many of these recommendations require lead time. While it is require lead time. While it is tempting to put them off, in this tempting to put them off, in this aggressive regulatory environment aggressive regulatory environment that would be a mistake. Think of it that would be a mistake. Think of it like working out. If you avoid going to like working out. If you avoid going to the gym, it’s that much more painful the gym, it’s that much more painful when you do finally get around to it. when you do finally get around to it.