November 10, 2020 • 19 mins
Join Oyster Consulting's former regulators Patrick M. Dennis, Jeffrey Hiller, Bill Reilly, Evan Rosser and Ed Wegener in our new podcast mini-series, Regulators- Behind the Scenes. In each episode, they share their experiences and perspectives as former regulators with the SEC, FINRA and the State of Florida, as well as experiences working as CCOs and consulting for clients on regulatory exams and issues. Some things you just won't learn from a textbook, such as managing your relationship with regulators, what to expect during an exam, handling violations and document production during an exam, and escalation, to name a few.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Oyster (00:09):
Welcome to the Oyster Stew podcast, where we discuss
what's happening in the industrybased on what we see as we work
with regulators and clients.
Oyster consultants are industrypractitioners- we aren't career
consultants.
We've done your job and we knowthe issues you face.
You can learn more about OysterConsulting and the value we can
(00:30):
add to your firm by going to ourwebsite, Oysterllc.com.
Patrick Dennis (00:43):
Welcome to "Regulators- Behind the Scenes,"
an Oyster podcast mini-series.
I'm Patrick Dennis, GeneralCounsel of Oyster Consulting,
and with me are other formerregulators who are now working
for Oyster (00:53):
Jeffrey Hiller, former SEC Enforcement Senior
Counsel and CCO of severalnational advisory firms
including Merrill Lynch andMorgan Stanley; Ed Wegener, who
spent over 20 years at FINRA(andleft about nine months ago) as
Senior Vice President andRegional Office Manager for
(01:14):
FINRA's Midwest Region; EvanRosser, also a former FINRA
regulator for over 20 years; andBill Reilley, a State of Florida
regulator for over 30 years.
I, Patrick Dennis, was at theSEC in Washington as well in
both Court FIN and the Divisionof Enforcement for eight and a
half years.
(01:36):
You may have already listened toour"CCO- Behind the Scenes"
podcast with Jeffrey Hiller.
We thought we would share withyou some behind the scenes looks
at what regulators consider whenthey come in to do exams, look
at document productions, requestdocuments, and many other
topics.
As with being a CCO, as youknow, there's more to compliance
(01:56):
than just what's in the books.
Let's jump in.
Help us out in terms of lettingpeople know what to do.
One of the things we know is,you know an ex am i s c oming.
You don't necessarily know when,but sooner or later so mebody i
s g oing to come in, whetherit's the SEC or FINRA, that's
going to come in and examineyou.
Obviously the SEC on the RIAside and maybe on the BD side,
(02:17):
and FINRA on the BD side.
But let's talk a little bitabout what you should expect
from regulators and, from ourprevious experience, what we
think we can help people outwith by what to expect.
So let's start with JeffreyHiller, if you want to tell us
your thoughts on this.
Jeffrey HIller (02:37):
Sure.
One of the things the SEC andFINRA both do is put out a list
of their sort of top 10 areaswhere they find most violations,
and may put out a list of theirpriorities.
As I said, the first thing is,on an ongoing basis to
incorporate the items that SECnotes, whether there's
(02:58):
supervision, custody, orwhatever it may be, to include
those into your compliancecalendar and include them into
your ongoing review, so that ifthey came in, they would see
that you have their prioritieswithin your own set of
priorities, in terms of what youwant to review and make sure
that the firm is compliantabout.
Patrick Dennis (03:17):
Thanks, Jeff.
I think it's true that certainlyboth FINRA and the SEC come out
with their top 10 lists everyyear.
T hey come out the first,usually the first week or so of
the year.
It's surprising the number ofpeople that don't pay any
attention to that, I think, andthere's awfully often a lot of
repeat topics, things you'll seeyear after year.
(03:38):
Evan do you have any thoughts onthat?
Evan Rosser (03:41):
I think the one thing firms can also anticipate
from regulators, be it the SECor FINRA, they're often looking
new rules, new products, newregulations.
I think the regulators are notimmune from the press, and if
there's an issue in thefinancial world that is getting
(04:02):
public attention, there's a goodchance that the regulators will
be looking at it to see how yourfirms responding to it.
Patrick Dennis (04:09):
Yeah.
I think certainly certain topicskeep coming up year after year.
For example, on the RIA side feecalculations is always a topic.
On the BD side, we know there'salways discussions about
variable annuities.
Va luation s eems to be arecurring topic, but there's a
number of them.
(04:29):
Ed, any thoughts?
Ed Wegener (04:31):
Yeah.
You know, in addition to thesesort of broader topics about
things that are going onexternally, and sort of the
broad topics that the regulatorsare looking at, what I've found
is that they're also gettingmuch better at having a better
look into specific unique issuesand risks at firms, and I can
speak to FINRA specifically.
(04:52):
Over the last several years, onebig driving factor of what they
look at on exams are the riskassessments that are done by the
risk a nalysts.
W e used to be called regulatorycoordinators.
These are individuals that firmsare assigned to, and for t hose
firms that they're assigned to,the analysts are responsible for
(05:12):
assessing the risk on an ongoingbasis at those firms.
They use a lot of different datato do those assessments, and
those assessments are really thefirst step in narrowing the
scope of the examinations andmaking them more risk-based.
So one factor that I think is aprimary driver of what examiners
(05:32):
are going to look at on an examare those assessments that are
done by the risk analysts.
Another thing that's become asignificant factor in narrowing
the scope of examinations is thedata analytics that are done by
examiners.
Before they can come out andconduct an examination, they are
requesting electronic access tothings like blotters and then
(05:54):
running analytics against thoseblotters.
Where in the past they were moreapt to do random samples to
decide what it is they're goingto focus on, they're now going
to come out and have a bettersense of where they think the
problems are and ask forspecific transactions where they
might see risks.
So I think the things thateverybody h as talked about
(06:14):
already, like priorities and newrules, sort of national scope
issues are big factors, as wellas those more micro areas that
they're finding, doing this riskanalysis and blotter analytics,
Patrick Dennis (06:30):
I think one of the things that we know is
coming is Reg BI.
There's going to be some examtopics or exam priorities on Reg
BI or Form CRS on the RIA side.
It is a hot topic with theregulators.
I fully expect it's going to besomething that they're g oing t
o put on their exam priorities,at least making sure that the
(06:52):
firms are making an effort.
Jeff, did you have something toadd?
Jeffrey HIller (06:55):
Yeah, I was going to say that one of their
priorities is, if you have beenexamined by the SEC or FINRA or
any regulator in the past, andyou got a deficiency, that
should always be on yourcalendar because they will look
back to see if they, say, didsomething a few years ago, and
then see if you're still incompliance.
So that's one where you reallyneed to be on top of the ball.
(07:17):
You should always look at yourpast exams and you should always
be prepared.
Even when they don't c ommit, beprepared to know where you are
on those particular r ights.
Patrick Dennis (07:25):
That's right.
It's always helpful to beprepared rather than being
caught by surprise.
Listen, we all know that theseexaminations are disruptive.
There's no way around it, butthe better prepared you are, the
less disruptive they will be.
If you are doing an ongoingeffort to think that you're
ready, if they walked intomorrow or you got the first
day letter tomorrow, you're alot better off than if you're
(07:48):
scrambling to try and pull allyour stuff together, and do the
Annual Review that you weresupposed to do six months ago,
and all those kinds of things.
Bill, anything to add from thestate side of things?
I mean, I know that obviouslythey c ome i n a nd do exams on
a regular basis, and for cause,et cetera, bu t g o ah ead.
Bill Reilly (08:06):
In addition to what everyone has said earlier, a
couple of things about theStates.
They are all members of theNorth American Securities
Administrators Association, alsoknown as NAASA.
There is a substantial amount ofcoordination via the state.
You know, one of the things thatwe talked about are maybe
looking at products and andprocesses.
(08:28):
I think one of the things thatyou're looking at is that some
of the exams you might see areexam sweeps.
These are situations where itmay be the topic of the day.
One of the sweeps that was notedby NAASA, just a short while ago
was the fact that States wentout collectively.
We talked for just a few minutesago about Reg BI focus, and the
(08:50):
States went out and did abenchmark review of where firms
are broker-dealers versusinvestment advisors.
What products are being sold,what type of disclosure, what
types of commissions and fees,and they'll come back probably
sometime in 2021 and see, nowthat Reg BI has been adopted as
of June, where things stand.
(09:11):
So I think you're looking atsweep exams, you're also looking
at focused exams, and I thinkthat happens across the board.
Whether you're dealing with theStates, the SEC or FINRA, you
may have a situation where, forexample, I believe in 2019,
FINRA did a sweep a nd a reviewof UTMA and UGMA programs.
(09:34):
There was a determination madethat many of these investments-
people who held t hem r eachedthe age of majority and firms w
ere not monitoring those.
So there was a big focus andnotice that went out from FINRA.
But I, in my previous life as aregulator, and many of the
people that are on the panel, weworked in a formal kind of
(09:58):
nature.
I'm not sure about that now.
You may be able to address that,but I do know that there was
cooperation between the SEC andFINRA, there were general
examinations and sweeps thatwere conducted.
Patrick Dennis (10:14):
Maybe we ought to back up and talk about it.
I think we approached t hisoriginally with the idea of
talking about routine exams, butmaybe we ought to spend a minute
or two talking a little bitabout the different types of
exams (10:26):
routine exams, for c ause exams, and sweeps.
Ed, do you want to address that?
Ed Wegener (10:33):
I think each regulator has different
variations of these, but I wouldsay that examinations really
fall into three buckets.
There's the routine examinationwhere they come out and test
your controls, look atparticular areas that might be
priorities.
At FINRA.
those exams are going to takeplace at a minimum every four
years, but really, the frequencyof the exams are going to be
(10:56):
driven by those risk assessmentsthat the analysts are doing.
The analysts are the ones that,based on those risk assessments,
will determine the frequency ofthose examinations.
And then there's causeexaminations, because exams are
really investigations intoparticular activity.
Then finally, there are sweepexaminations, and sweep
(11:18):
examinations are exams where aregulator or, like Bill had
mentioned, the combination ofregulators like the SEC FINRA
and potentially the States,might see that there's a
potential industry-wide issue,and decide to look at the
activity across a number ofdifferent firms.
One of the things that FINRA hasdone, that's been really helpful
(11:39):
I think, along the lines ofhaving more transparency into
their programs, is when they doinitiate a sweep examination
they'll publish the documentrequests that they send out to
those firms so that other firmsthat might not be part of the
sweep can get an idea of thetypes of things that they're
looking at.
Patrick Dennis (11:58):
One of the things I would mention is, just
because the regulator tells youit's a routine exam, it may not
be.
I remember specifically one examwhere the SEC kept saying it was
a routine exam, butinterestingly enough, they only
asked about one Rep and hisaccounts and his trading
activity.
It was a guy that had created alot of attention and everything
(12:20):
else that, even though they keptcalling it a routine exam, there
was little doubt in anybody'smind that they were looking
specifically at this Rep and hisconduct, and kept telling me
that it was routine exam.
So just because they call it aroutine exam, you better pay
attention to what they're askingabout, because it may be a
little different than whatthey're telling you.
Jeffrey, any thoughts?
Jeffrey HIller (12:41):
No, I thought your insight was really true.
It wasn't something I thoughtabout, but oftentimes you can
tell what they're looking for bythe types of documents they
request or don't request.
And so I think it's a prettycogent point.
Evan Rosser (12:56):
When I was with FINRA in the Enforcement
Department, we made it veryclear that it was not a routine
exam because we wanted the firmsto have that expectation that we
were going to focus on aparticular security or issue or
person.
And I think that just iseffective for both the firm and
for the regulator so that theyknow, because each one of the
(13:20):
rules are slightly different.
I think it's important for afirm to determine, and the firm
is entitled up to a point, toknow the nature of the exam
that's being conducted there.
Regulators are never going totell you everything that they
have or why, but to the point Edmade earlier, whenever a
regulator comes in they willhave done their homework.
(13:43):
They will know what the firm isup to, and you should be aware
as well, that, if you have achange in your business, chances
are it's going to be an itemthat's going to be on the
routine exam.
If you have terminated someonefor cause you can expect to have
an exam on that issue.
(14:03):
If you have a series of customercomplaints around a particular
individual or a product, you canexpect a cause exam around that
issue.
So those exams are a littledifferent.
They come from different placesand your response to them will
be a little bit different.
One point as well, that wheneveryou get an exam request, it will
(14:26):
likely have a review period onit, and you don't have to
provide anything outside thatreview period.
So when you get those requests,either verbally or in writing,
see what the exam period isbecause that's the period that,
(14:47):
until FINRA comes back to you orany regulator, that's the period
in which you are working and youdon't need to give them anything
outside that period.
Patrick Dennis (14:56):
I think you can do yourself a big favor by
making sure you stick to thatperiod and that period only.
In fact, there are certainlytimes that I remember discussing
with the regulator andnegotiating time periods and
things like that on what we had,what we didn't have, what we
were going to provide.
Sometimes it's more challengingthan other things.
(15:16):
Occasionally regulators willwork with you on time periods
and things in terms of whetherit seems inordinately long or
short or something, but Ed, didyou have anything to add?
Ed Wegener (15:27):
Well, Patrick, I think you bring up a good point
there.
It's something that I think thatfrom a regulator standpoint,
when we would start anexamination, whether it was a
routine examination or a causeexam or a sweep, we had a goal
in mind, like we wanted toreview whatever it was that we
reviewing.
We wanted to do it efficiently,but make sure that we had done
it effectively.
(15:47):
The requests that we made wereusually based on the information
that we had at the time, and nothaving a lot of information
about how firm kept those booksand records.
So I would recommend that if youdo receive a request, and
whether it's the review periodseeming like it's very long, or
whether it's the requests, theinformation that's being
(16:07):
requested, seems overly broadis, to feel free to reach out to
the person making the request,discuss with them and negotiate
with them, the things thatthey're requesting.
Because I think you'll find thatthey're generally open to those
types of negotiations, as longas they're able to investigate
what they need to investigate,and do so as efficiently as
(16:30):
possible.
Bill Reilly (16:31):
Patrick, if I can, we haven't touched on yet, is
whether we're doing a home or abranch office.
A lot of the focus of a lot ofthe States is branch office
activity, and one of the thingsyou'll find over the last 5 to
10 years is you'll change thefocus o f products, focus of
services at branch offices,varying immensely.
(16:55):
I'm currently doing someexaminations, a branch office,
right now, w here at one officeyou have 100% investment
advisory activity; at anotherbranch you have an office where
you have 100% broker dealer.
At some other offices, you havea hybrid where you have both
broker-dealer and investmentadvisor- different focus,
(17:19):
different provisions.
And as firms continue to expandlocations and products, cl
ients, the procedures are beingincreased on a daily basis.
But I do think it's somethingthere that, w hether these are
FINRA-registered branches,state-registered branches,
(17:39):
registered investment advisors,each of them have a distinct
Policies and Procedures Manual,operating procedures, and they
have a different skill set.
Patrick Dennis (17:52):
Okay.
Thanks Bill.
Any further observations by anyof our former regulators on
exams in general, before we moveon to the next topic?
Jeffrey HIller (18:03):
I might touch base on a point that everybody's
been discussing, which is thedocument production.
I have found that there aretimes when the SEC will, or
FINRA, will request somethingand really not understand that
they've just requested 2 millionpages of documents, or three.
So I have found that if youestablish a good relationship
(18:25):
early on and ask them if that'sreally what they want or how you
can hone it, I've always hadsuccess in that area.
If I've explained it and youhave the initial rapport that
they know you're not trying todo anything untold.
Patrick Dennis (18:39):
Right.
I think they very well may notknow exactly what they're asking
for or the size of what they'retalking about, so, it is worth
reviewing the request, talkingto the regulators about it.
Is this really what they want,or what are they trying to get
at?
B ecause you may be able toprovide them something that
gives them the information theywant with a lot less time and
effort on your part and on theirpart.
(19:00):
That's all the time we aftertoday.
Join us for Episode 2 as we talkabout document r equests during
an exam and the importance ofgood communication with
regulators,
Oyster (19:18):
Thanks for listening.
If you like what you heard, makesure to follow the Oyster Stew
podcast on whatever platform youlisten to.
If you'd like to learn how wecan help firms start, run,
protect, and grow theirbusiness, visit our website at
oysterllc.com.
Welcome to the Oyster Stew podcast, where we discuss
what's happening in the industrybased on what we see as we work
with regulators and clients.
Oyster consultants are industrypractitioners- we aren't career
consultants.
We've done your job and we knowthe issues you face.
You can learn more about OysterConsulting and the value we can
(00:30):
add to your firm by going to ourwebsite, Oysterllc.com.
Patrick Dennis (00:43):
Welcome to "Regulators- Behind the Scenes,"
an Oyster podcast mini-series.
I'm Patrick Dennis, GeneralCounsel of Oyster Consulting,
and with me are other formerregulators who are now working
for Oyster (00:53):
Jeffrey Hiller, former SEC Enforcement Senior
Counsel and CCO of severalnational advisory firms
including Merrill Lynch andMorgan Stanley; Ed Wegener, who
spent over 20 years at FINRA(andleft about nine months ago) as
Senior Vice President andRegional Office Manager for
(01:14):
FINRA's Midwest Region; EvanRosser, also a former FINRA
regulator for over 20 years; andBill Reilley, a State of Florida
regulator for over 30 years.
I, Patrick Dennis, was at theSEC in Washington as well in
both Court FIN and the Divisionof Enforcement for eight and a
half years.
(01:36):
You may have already listened toour"CCO- Behind the Scenes"
podcast with Jeffrey Hiller.
We thought we would share withyou some behind the scenes looks
at what regulators consider whenthey come in to do exams, look
at document productions, requestdocuments, and many other
topics.
As with being a CCO, as youknow, there's more to compliance
(01:56):
than just what's in the books.
Let's jump in.
Help us out in terms of lettingpeople know what to do.
One of the things we know is,you know an ex am i s c oming.
You don't necessarily know when,but sooner or later so mebody i
s g oing to come in, whetherit's the SEC or FINRA, that's
going to come in and examineyou.
Obviously the SEC on the RIAside and maybe on the BD side,
(02:17):
and FINRA on the BD side.
But let's talk a little bitabout what you should expect
from regulators and, from ourprevious experience, what we
think we can help people outwith by what to expect.
So let's start with JeffreyHiller, if you want to tell us
your thoughts on this.
Jeffrey HIller (02:37):
Sure.
One of the things the SEC andFINRA both do is put out a list
of their sort of top 10 areaswhere they find most violations,
and may put out a list of theirpriorities.
As I said, the first thing is,on an ongoing basis to
incorporate the items that SECnotes, whether there's
(02:58):
supervision, custody, orwhatever it may be, to include
those into your compliancecalendar and include them into
your ongoing review, so that ifthey came in, they would see
that you have their prioritieswithin your own set of
priorities, in terms of what youwant to review and make sure
that the firm is compliantabout.
Patrick Dennis (03:17):
Thanks, Jeff.
I think it's true that certainlyboth FINRA and the SEC come out
with their top 10 lists everyyear.
T hey come out the first,usually the first week or so of
the year.
It's surprising the number ofpeople that don't pay any
attention to that, I think, andthere's awfully often a lot of
repeat topics, things you'll seeyear after year.
(03:38):
Evan do you have any thoughts onthat?
Evan Rosser (03:41):
I think the one thing firms can also anticipate
from regulators, be it the SECor FINRA, they're often looking
new rules, new products, newregulations.
I think the regulators are notimmune from the press, and if
there's an issue in thefinancial world that is getting
(04:02):
public attention, there's a goodchance that the regulators will
be looking at it to see how yourfirms responding to it.
Patrick Dennis (04:09):
Yeah.
I think certainly certain topicskeep coming up year after year.
For example, on the RIA side feecalculations is always a topic.
On the BD side, we know there'salways discussions about
variable annuities.
Va luation s eems to be arecurring topic, but there's a
number of them.
(04:29):
Ed, any thoughts?
Ed Wegener (04:31):
Yeah.
You know, in addition to thesesort of broader topics about
things that are going onexternally, and sort of the
broad topics that the regulatorsare looking at, what I've found
is that they're also gettingmuch better at having a better
look into specific unique issuesand risks at firms, and I can
speak to FINRA specifically.
(04:52):
Over the last several years, onebig driving factor of what they
look at on exams are the riskassessments that are done by the
risk a nalysts.
W e used to be called regulatorycoordinators.
These are individuals that firmsare assigned to, and for t hose
firms that they're assigned to,the analysts are responsible for
(05:12):
assessing the risk on an ongoingbasis at those firms.
They use a lot of different datato do those assessments, and
those assessments are really thefirst step in narrowing the
scope of the examinations andmaking them more risk-based.
So one factor that I think is aprimary driver of what examiners
(05:32):
are going to look at on an examare those assessments that are
done by the risk analysts.
Another thing that's become asignificant factor in narrowing
the scope of examinations is thedata analytics that are done by
examiners.
Before they can come out andconduct an examination, they are
requesting electronic access tothings like blotters and then
(05:54):
running analytics against thoseblotters.
Where in the past they were moreapt to do random samples to
decide what it is they're goingto focus on, they're now going
to come out and have a bettersense of where they think the
problems are and ask forspecific transactions where they
might see risks.
So I think the things thateverybody h as talked about
(06:14):
already, like priorities and newrules, sort of national scope
issues are big factors, as wellas those more micro areas that
they're finding, doing this riskanalysis and blotter analytics,
Patrick Dennis (06:30):
I think one of the things that we know is
coming is Reg BI.
There's going to be some examtopics or exam priorities on Reg
BI or Form CRS on the RIA side.
It is a hot topic with theregulators.
I fully expect it's going to besomething that they're g oing t
o put on their exam priorities,at least making sure that the
(06:52):
firms are making an effort.
Jeff, did you have something toadd?
Jeffrey HIller (06:55):
Yeah, I was going to say that one of their
priorities is, if you have beenexamined by the SEC or FINRA or
any regulator in the past, andyou got a deficiency, that
should always be on yourcalendar because they will look
back to see if they, say, didsomething a few years ago, and
then see if you're still incompliance.
So that's one where you reallyneed to be on top of the ball.
(07:17):
You should always look at yourpast exams and you should always
be prepared.
Even when they don't c ommit, beprepared to know where you are
on those particular r ights.
Patrick Dennis (07:25):
That's right.
It's always helpful to beprepared rather than being
caught by surprise.
Listen, we all know that theseexaminations are disruptive.
There's no way around it, butthe better prepared you are, the
less disruptive they will be.
If you are doing an ongoingeffort to think that you're
ready, if they walked intomorrow or you got the first
day letter tomorrow, you're alot better off than if you're
(07:48):
scrambling to try and pull allyour stuff together, and do the
Annual Review that you weresupposed to do six months ago,
and all those kinds of things.
Bill, anything to add from thestate side of things?
I mean, I know that obviouslythey c ome i n a nd do exams on
a regular basis, and for cause,et cetera, bu t g o ah ead.
Bill Reilly (08:06):
In addition to what everyone has said earlier, a
couple of things about theStates.
They are all members of theNorth American Securities
Administrators Association, alsoknown as NAASA.
There is a substantial amount ofcoordination via the state.
You know, one of the things thatwe talked about are maybe
looking at products and andprocesses.
(08:28):
I think one of the things thatyou're looking at is that some
of the exams you might see areexam sweeps.
These are situations where itmay be the topic of the day.
One of the sweeps that was notedby NAASA, just a short while ago
was the fact that States wentout collectively.
We talked for just a few minutesago about Reg BI focus, and the
(08:50):
States went out and did abenchmark review of where firms
are broker-dealers versusinvestment advisors.
What products are being sold,what type of disclosure, what
types of commissions and fees,and they'll come back probably
sometime in 2021 and see, nowthat Reg BI has been adopted as
of June, where things stand.
(09:11):
So I think you're looking atsweep exams, you're also looking
at focused exams, and I thinkthat happens across the board.
Whether you're dealing with theStates, the SEC or FINRA, you
may have a situation where, forexample, I believe in 2019,
FINRA did a sweep a nd a reviewof UTMA and UGMA programs.
(09:34):
There was a determination madethat many of these investments-
people who held t hem r eachedthe age of majority and firms w
ere not monitoring those.
So there was a big focus andnotice that went out from FINRA.
But I, in my previous life as aregulator, and many of the
people that are on the panel, weworked in a formal kind of
(09:58):
nature.
I'm not sure about that now.
You may be able to address that,but I do know that there was
cooperation between the SEC andFINRA, there were general
examinations and sweeps thatwere conducted.
Patrick Dennis (10:14):
Maybe we ought to back up and talk about it.
I think we approached t hisoriginally with the idea of
talking about routine exams, butmaybe we ought to spend a minute
or two talking a little bitabout the different types of
exams (10:26):
routine exams, for c ause exams, and sweeps.
Ed, do you want to address that?
Ed Wegener (10:33):
I think each regulator has different
variations of these, but I wouldsay that examinations really
fall into three buckets.
There's the routine examinationwhere they come out and test
your controls, look atparticular areas that might be
priorities.
At FINRA.
those exams are going to takeplace at a minimum every four
years, but really, the frequencyof the exams are going to be
(10:56):
driven by those risk assessmentsthat the analysts are doing.
The analysts are the ones that,based on those risk assessments,
will determine the frequency ofthose examinations.
And then there's causeexaminations, because exams are
really investigations intoparticular activity.
Then finally, there are sweepexaminations, and sweep
(11:18):
examinations are exams where aregulator or, like Bill had
mentioned, the combination ofregulators like the SEC FINRA
and potentially the States,might see that there's a
potential industry-wide issue,and decide to look at the
activity across a number ofdifferent firms.
One of the things that FINRA hasdone, that's been really helpful
(11:39):
I think, along the lines ofhaving more transparency into
their programs, is when they doinitiate a sweep examination
they'll publish the documentrequests that they send out to
those firms so that other firmsthat might not be part of the
sweep can get an idea of thetypes of things that they're
looking at.
Patrick Dennis (11:58):
One of the things I would mention is, just
because the regulator tells youit's a routine exam, it may not
be.
I remember specifically one examwhere the SEC kept saying it was
a routine exam, butinterestingly enough, they only
asked about one Rep and hisaccounts and his trading
activity.
It was a guy that had created alot of attention and everything
(12:20):
else that, even though they keptcalling it a routine exam, there
was little doubt in anybody'smind that they were looking
specifically at this Rep and hisconduct, and kept telling me
that it was routine exam.
So just because they call it aroutine exam, you better pay
attention to what they're askingabout, because it may be a
little different than whatthey're telling you.
Jeffrey, any thoughts?
Jeffrey HIller (12:41):
No, I thought your insight was really true.
It wasn't something I thoughtabout, but oftentimes you can
tell what they're looking for bythe types of documents they
request or don't request.
And so I think it's a prettycogent point.
Evan Rosser (12:56):
When I was with FINRA in the Enforcement
Department, we made it veryclear that it was not a routine
exam because we wanted the firmsto have that expectation that we
were going to focus on aparticular security or issue or
person.
And I think that just iseffective for both the firm and
for the regulator so that theyknow, because each one of the
(13:20):
rules are slightly different.
I think it's important for afirm to determine, and the firm
is entitled up to a point, toknow the nature of the exam
that's being conducted there.
Regulators are never going totell you everything that they
have or why, but to the point Edmade earlier, whenever a
regulator comes in they willhave done their homework.
(13:43):
They will know what the firm isup to, and you should be aware
as well, that, if you have achange in your business, chances
are it's going to be an itemthat's going to be on the
routine exam.
If you have terminated someonefor cause you can expect to have
an exam on that issue.
(14:03):
If you have a series of customercomplaints around a particular
individual or a product, you canexpect a cause exam around that
issue.
So those exams are a littledifferent.
They come from different placesand your response to them will
be a little bit different.
One point as well, that wheneveryou get an exam request, it will
(14:26):
likely have a review period onit, and you don't have to
provide anything outside thatreview period.
So when you get those requests,either verbally or in writing,
see what the exam period isbecause that's the period that,
(14:47):
until FINRA comes back to you orany regulator, that's the period
in which you are working and youdon't need to give them anything
outside that period.
Patrick Dennis (14:56):
I think you can do yourself a big favor by
making sure you stick to thatperiod and that period only.
In fact, there are certainlytimes that I remember discussing
with the regulator andnegotiating time periods and
things like that on what we had,what we didn't have, what we
were going to provide.
Sometimes it's more challengingthan other things.
(15:16):
Occasionally regulators willwork with you on time periods
and things in terms of whetherit seems inordinately long or
short or something, but Ed, didyou have anything to add?
Ed Wegener (15:27):
Well, Patrick, I think you bring up a good point
there.
It's something that I think thatfrom a regulator standpoint,
when we would start anexamination, whether it was a
routine examination or a causeexam or a sweep, we had a goal
in mind, like we wanted toreview whatever it was that we
reviewing.
We wanted to do it efficiently,but make sure that we had done
it effectively.
(15:47):
The requests that we made wereusually based on the information
that we had at the time, and nothaving a lot of information
about how firm kept those booksand records.
So I would recommend that if youdo receive a request, and
whether it's the review periodseeming like it's very long, or
whether it's the requests, theinformation that's being
(16:07):
requested, seems overly broadis, to feel free to reach out to
the person making the request,discuss with them and negotiate
with them, the things thatthey're requesting.
Because I think you'll find thatthey're generally open to those
types of negotiations, as longas they're able to investigate
what they need to investigate,and do so as efficiently as
(16:30):
possible.
Bill Reilly (16:31):
Patrick, if I can, we haven't touched on yet, is
whether we're doing a home or abranch office.
A lot of the focus of a lot ofthe States is branch office
activity, and one of the thingsyou'll find over the last 5 to
10 years is you'll change thefocus o f products, focus of
services at branch offices,varying immensely.
(16:55):
I'm currently doing someexaminations, a branch office,
right now, w here at one officeyou have 100% investment
advisory activity; at anotherbranch you have an office where
you have 100% broker dealer.
At some other offices, you havea hybrid where you have both
broker-dealer and investmentadvisor- different focus,
(17:19):
different provisions.
And as firms continue to expandlocations and products, cl
ients, the procedures are beingincreased on a daily basis.
But I do think it's somethingthere that, w hether these are
FINRA-registered branches,state-registered branches,
(17:39):
registered investment advisors,each of them have a distinct
Policies and Procedures Manual,operating procedures, and they
have a different skill set.
Patrick Dennis (17:52):
Okay.
Thanks Bill.
Any further observations by anyof our former regulators on
exams in general, before we moveon to the next topic?
Jeffrey HIller (18:03):
I might touch base on a point that everybody's
been discussing, which is thedocument production.
I have found that there aretimes when the SEC will, or
FINRA, will request somethingand really not understand that
they've just requested 2 millionpages of documents, or three.
So I have found that if youestablish a good relationship
(18:25):
early on and ask them if that'sreally what they want or how you
can hone it, I've always hadsuccess in that area.
If I've explained it and youhave the initial rapport that
they know you're not trying todo anything untold.
Patrick Dennis (18:39):
Right.
I think they very well may notknow exactly what they're asking
for or the size of what they'retalking about, so, it is worth
reviewing the request, talkingto the regulators about it.
Is this really what they want,or what are they trying to get
at?
B ecause you may be able toprovide them something that
gives them the information theywant with a lot less time and
effort on your part and on theirpart.
(19:00):
That's all the time we aftertoday.
Join us for Episode 2 as we talkabout document r equests during
an exam and the importance ofgood communication with
regulators,
Oyster (19:18):
Thanks for listening.
If you like what you heard, makesure to follow the Oyster Stew
podcast on whatever platform youlisten to.
If you'd like to learn how wecan help firms start, run,
protect, and grow theirbusiness, visit our website at
oysterllc.com.
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