November 10, 2020 • 18 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 this episode, they share their experiences and perspectives as former SEC, FINRA and State regulators on what happens with when regulators find a violation and how they deal with it.
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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):
Thanks for joining us for this episode of
"Regulators- Behind the Scenes."We've talked before this about
the level of severity and howpeople perceive what the
regulators are going to do, andI think it'd be great for us to
address our thoughts andexperiences on what happens with
(01:03):
when regulators find a violationand how they deal with it.
Maybe, start with Jeff.
Jeffrey Hiller (01:09):
Sure.
I have been in situations when aregulator has sat down and
they've raised concerns about aparticular issue.
When they first raise theseissues, I think it's a good time
to listen, to find out whetherthey have the true picture, to
see what they're trying to getat and to see whether it's
something that on the risk scaleand where did you put it?
So my first sort of thoughtwould be to really listen to the
(01:32):
issue that you're getting to,and then seeing if there's a
good reason for saying,"Look,let's, let's discuss this later.
Let me gather some more factsand try to put a fuller picture
around it." And at the sametime, you want to escalate that
in the firm to others, such asthe legal department, maybe the
risk department, and get moreanswers before you go back to
(01:53):
talk with them.
I find that candor andstraightforwardness, eagerness,
and zealousness to fix thingsand fix them quickly in a proper
way are how I would address itinitially.
B ut t here a re cases wherethey're wrong, and decisional
facts will help you supplementthat.
Patrick Dennis (02:13):
I have had incidences where we got a Wells
notice from FINRA aboutsomething and we took a week's
worth of testimony and things onvarious issues.
It was pretty easy to explain,saying wait a minute, you
totally missed this.
We talked about this during thetestimony that these were just
journal entries.
(02:33):
They weren't actually trades.
They were sort of dividends thatwere reinvested, and things like
that.
So this trading activity thatyou're complaining about or
you're concerned about didn'treally occur.
A nd there are times whenthere's a misunderstanding by
the regulators or by the firmsas to what the issue is, and
things like that.
It's always important to makesure that you understand what
(02:54):
the concern is and youunderstand how to explain it the
best you can.
But Ed, your thoughts on dealingwith the violations?
Ed Wegener (03:04):
I think that's spot on because I think there's
really two determinations thathave to be made by the
regulators, right?
The first is whether there is aviolation and the second is, if
there is a violation, what arewe going to do about it?
Those are two really separatediscussions here.
To your point, there are severalpoints during the examination
where you can provideinformation to help to make that
(03:27):
determination of whether thereis or isn't a violation.
It starts to, to Jeffrey'spoint, when the examiners first
start talking about it, beforethere's an exit conference,
before there's an examinationreport that's issued, they're
going to let you know throughoutthe exam, whether there's
something that they see, andstart gathering information
about it.
So at that point, you want toprovide them as much information
(03:48):
as you can to help show themthat we don't think that there's
a violation or again, toJeffrey's point, there is a
violation and we're starting totake care of it.
Then there's a lot of levels ofreview that happens.
So that's one thing- that I'mnot sure people appreciate- is
just t he number of levels ofreview that go on throughout the
course of the examination beforethere's a final determination
(04:11):
and examiners will turn it intotheir managers who review it.
If it's something where there'sa violation that that looks like
it might be referred toEnforcement, senior management w
ill usually take a look at it aswell.
So there's a lot of points ofreview, and those are also
opportunities to get in front ofthe regulator and plead your
case.
But once it's been determinedthat t here's a violation and
(04:33):
that there's evidence thatsupports the violation, the
question becomes,"So what areyou going to do about it?" And
at FINRA, and this is similar, Ithink to what the other
regulators do, we h ad differentthings that we could do, some
formal actions, some informal,so t hat exam could result in No
Action being taken.
It can result in a letter ofcaution where we identify, these
(04:53):
are the issues that are found,show us how you're going to fix
them.
There were some cases whereFINRA would hold what we called
corrective action meetings,where it was something that was
probably more egregious than aletter of caution would resolve,
but didn't feel like it wassomething that should be
referred to Enforcement.
So they might call the f irm into have a discussion about it
(05:16):
and discuss how the firm's going t o resolve the issue.
If none of those things work ordon't appear to be appropriate,
then the determination is madeto refer it to Enforcement.
The factors that are consideredare, they'll take a look at the
violation and look to see andweigh aggravating factors and
mitigating factors.
(05:37):
Things like, was their customerharmed?
Was their intent to harm thecustomers?
Were the firm's procedures andsupervision good, or were they
poor?
When this was raised to thefirm?
What did they do about it?
Did they take action?
Did they dig their heels in andargue about it?
All of those factors go intomaking the determination of
(05:59):
whether to refer a matter toEnforcement.
And there were a couple ofdocuments from FINRA's
perspective that I would lookto.
One, FINRA issued an Enforcementguiding principles document,
which outlined some of thefactors that they look to when
making those determinations, butthen also something that was
recently amended, o ur F INRAsanction guidelines.
(06:19):
In those sa nctioned guidelines, they ou tline a
ggravating and mitigatingfactors based on by violation.
So you can see what are thespecific things that regulators
wi ll l ook at when determiningboth sanctions, but also whether
to make a referral toenforcement.
Patrick Dennis (06:34):
One of the things that we've all talked
about in preparing for this, issome number of firms that think
everything, every violation isgoing to turn into Enforcement
referral.
And frankly, we know that's notthe case.
The number of exams that turninto Enforcement or Enforcement
referrals or Enforcement actionsis really pretty small, at least
(06:54):
from my experience, and I thinkeverybody else agrees.
The other challenge is t hatthere are a lot of steps before
we get to Enforcement orreferral.
You guys correct me if I'mwrong, but there are deficiency
letters that require correctiveaction or a corrective action
statement that's required.
I don't know if they're stilldoing compliance conferences,
but they used to you in and havea conference with you, discuss
(07:17):
the issues and concerns, andthat those are much more
prevalent.
An informal referral is sort ofthe almost final step in the
process, if they have some veryserious violations and de
ficiencies.
Jeff, did you have something toadd?
Jeffrey Hiller (07:33):
I would agree that there are many, many steps
before you would ever get to anEnforcement action.
If it arises from the course ofan examination and they have an
issue that they've decided ortold you, they're going to refer
to Enforcement.
I think that before that time,you would have had a lot of
opportunities to probably steerit in a different direction or
(07:56):
at least to make sure that theyhave all the information they
need.
Bill Reilly (08:01):
Patrick, if I can add a couple of things, maybe
from a state perspective?
One of the things, and I'm notsure a lot of people in the
industry are aware of this, isthat, the SEC is able to enforce
of course, SEC and FINRA rules,and FINRA has certain
regulations, but one of thethings that a lot of States do
is adopt FINRA, SEC, MSRB andNAASA model rules and
(08:26):
guidelines, as well as statestatutory references for each
individual state.
So one of the things that needsto be clear is that a state can
bring an action based upon astate law, a f ederal rule, t he
regulation, SEC regulation, MSRB regulation.
So that's something, to makesure you understand the
(08:50):
jurisdiction of the regulatorthat you're dealing with.
And think one of the otherthings that's really important-
understand, meet thoseregulators, because there were
many people in the industry thatknew me, and they would feel
very comfortable calling me.
Ed, you kind of mentioned thesituation of people reaching out
(09:12):
there from the regulatory sideor from the industry side to the
regulator.
And I can tell you many timeswhen examiners were conducting
exams or investigations, theywould bring attorneys in.
They would bring consultants in,very much like us here on the
panel today, and the one thingthat people would say before you
get to that point of resolvingthat case is, we want to have
(09:36):
the opportunity to come in andtalk to you.
We want to meet with you.
We want to make sure that we'reall at the same understanding,
want to make sure that ifsomeone did not provide a record
to you and we can correct that,we want to do that.
So I think it's imperative toknow the rules o r regulations,
but it's also important, if youcan, to know who the players are
(09:59):
because, as Ed said, most casesw ill end up in a cautionary or
deficiency letter, a largepercentage of cases will end up
in a formal, but a negotiatedsettlement.
And very few cases actually goto administrative proceeding.
That's just the way the processworks.
(10:20):
So understand rules,regulations, processes, players,
and people.
That's my recommendation.
Ed Wegener (10:28):
No, just to your point, and I want to emphasize
this, is there have been anumber of times that I've been
involved with where somethinglooked like it was going to be a
violation and maybe anenforcement referral, and even
late in the game information orevidence is provided that says,
(10:49):
"Hey, either this isn't aviolation or it might be a
violation, but has significantmitigation that we've changed
our minds." So I would neverforeclose on reaching out to the
regulators, providing whateverinformation that you think would
be helpful, because they don'twant to be at a hearing and have
that information come at thatpoint.
Patrick Dennis (11:09):
I would agree.
And I think we all havediscussed to some degree that
the fact that the examiners andthe people that you deal with in
the field don't necessarily havethe final say on what's going to
happen or what the outcome'sgoing to be.
But you occasionally will getsome pretty zealous examiners
that think everything is a majorissue and a major problem, but
(11:30):
gets back to the more seasoned,experienced folks at the office.
A lot of those things get toneddown, or I think reduced the
severity and the consequences,and all of that.
There is some logic and someappreciation for talking to
supervisors, asking to talk toan examiner supervisor, asking
(11:53):
to take things up the chain.
If you really have an issue youfeel strongly about, or you
think you're being mistreated,it's not the right word, but if
you think you're beingmisunderstood or you think that
there is a serious difference inwhat you think the rule requires
and what the examiner does, it'ssometimes it's worth going to a
supervisor, asking to talk to asupervisor and dinging up the
(12:13):
chain before it gets too faralong.
And that's an issue that I thinkwe've all dealt with.
Evan, your thoughts on that?
Evan Rosser (12:20):
Examiners in the field conducting the examination
are rarely going to give you anycertainty as to any findings at
that stage.
As everyone here has pointed outit, even an exam deficiency goes
through a process by which it'sreviewed.
(12:41):
Nevertheless, that examiner inthe field is the person giving
the information to the people upthe line.
When you get an indication thatthat examiner might have found a
problem, and you can tell by thequestions by the documents, by
the follow-up, whether thatmight be the case, I think it's
then you need to say,"Look,maybe there's something else
(13:04):
here I can explain to you,"because maybe your best defense,
your best explanation, is not inthose written documents that
they've you've produced andthey've requested.
Now, it'd be great if that's thegoal, but sometimes your best
explanation is outside thosedocuments and you need to make
the examiner aware of it.
(13:24):
That story goes along up theline.
And ideally, maybe that possibledeficiency doesn't go up the
line.
If you can shut it down duringthe exam process, the one
question or the one issue thatI've heard for years from firms
about examinations, is they saythe examiner doesn't understand
(13:45):
my business.
I have to take my time toexplain my business to the
examiner.
Well, that's not such a bad ideato explain your business to the
examiner.
In fact, it's a pretty goodidea.
And sometimes the examiner willask questions just to hear you
explain it.
It's not that they may not knowit or understand it, but they
want you to explain it to them.
(14:07):
So, if they want you to explainyour business, I would, rather
than heave a deep sigh and rollyour eyes, take the opportunity
to explain it and to provide theexplanation that puts your
business and your program in thebest light.
Jeffrey Hiller (14:24):
I think it's a good point.
I would say some of the initialmeetings I've attended with the
regulators, I generally had myCEO of whatever asset management
company I was working for comeinto the initial meeting to say,
we want to cooperate to set thetone.
I have also seen circumstancesor been involved in a
circumstance where the legaldepartment decided to fight
(14:48):
something with the documentproduction and made it worse.
What didn't necessarily have to,ended up in an Enforcement
action.
They took months and months andmonths because they said they
were reviewing emails, and thenwhen the examiners got the
emails, it was readily apparentby what was in the emails, with
(15:11):
pornography advertisements andeverything, that they knew that
the firm wasn't being straight.
And so it's a delicate balanceas to what you have to do and
the way you do it.
Ed Wegener (15:23):
You know, I've seen firms that have done this really
well, where the examiners wouldcome in on the first day and
they would sit down with themwith a PowerPoint presentation
and explain the firm, theactivities they were involved
in, the products they sell, howthe firm was organized, who did
what.
It took a little time.
But to the earlier point, youwant the examiners to understand
(15:48):
your business, because if theyhave violations, you want them
to be able to put that in thecontext of what you do.
The other thing too, is itstarts the examination off on a
positive, now that you're thereand you're going to help them.
You also then really own themessage because you're
explaining to them what the firmdoes, as opposed to them, trying
to figure it out on their own.
(16:09):
So to the extent that you can dothat and educate the examiners
at the beginning of the exam, Ithink i t definitely a benefit
and I think w ill really go along way.
Patrick Dennis (16:20):
One of the things that, when you were
talking about explaining yourfirm or explaining what you do
and things, I was the CCO for afirm that was wholesaling
structured products andstructured notes, right?
From the get go, we got an examsix months after the firm got
registered.
I spent a while explaining tothe examiner how we actually
operated what we did, how thefirm did it, all of those sorts
(16:44):
of things.
So if your business lines are alittle unusual or a little
different, or relatively new orsomething, that's not day-to-
day sort of operations, you maywant to be prepared to explain
to the examiner what yourbusiness is, what your business
model is, why it works, whyyou're exempt from submitting
stuff for advertising, becauseit's all internal use.
(17:05):
Only those kinds of things.
I went through a lot of thoseissues.
They had that and had we notgone about it with the idea that
we were going to explain it andcooperate and everything else,
that exam could have gone verydifferently.
It turned out to be verysuccessful, very few minor
issues, but a lot of it wasknowing upfront that we were
(17:27):
going to have to do a lot ofexplaining, to make sure that
they understood because it was arelatively new business model at
the time that we did it.
Jeffrey Hiller (17:34):
I've heard a lot of people say that they have to
educate the SEC or FINRA, orwhoever comes in, and I will say
that many of the firms that Iwent to or worked with, it could
take me a year to understandtheir business because it was so
complex.
They might've had sub-advisorsand little boutiques.
So I would approach explainingthe business to the examiners as
(17:59):
an opportunity to steer them towhat the culture is and what the
business really does.
It's not that simple from theoutside, looking in.
Patrick Dennis (18:08):
Thanks for listening and join us again on
our next episode, where wediscuss cooperation with the
regulators and the importance ofculture.
Oyster (18:26):
Thanks for listening, and if you like what you heard,
make sure to follow the Oysterstew podcast on whatever
platform you listen to.
If you'd like to learn how wecan help firms start, run,
protect, and grow theirbusiness, visit our
website@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):
Thanks for joining us for this episode of
"Regulators- Behind the Scenes."We've talked before this about
the level of severity and howpeople perceive what the
regulators are going to do, andI think it'd be great for us to
address our thoughts andexperiences on what happens with
(01:03):
when regulators find a violationand how they deal with it.
Maybe, start with Jeff.
Jeffrey Hiller (01:09):
Sure.
I have been in situations when aregulator has sat down and
they've raised concerns about aparticular issue.
When they first raise theseissues, I think it's a good time
to listen, to find out whetherthey have the true picture, to
see what they're trying to getat and to see whether it's
something that on the risk scaleand where did you put it?
So my first sort of thoughtwould be to really listen to the
(01:32):
issue that you're getting to,and then seeing if there's a
good reason for saying,"Look,let's, let's discuss this later.
Let me gather some more factsand try to put a fuller picture
around it." And at the sametime, you want to escalate that
in the firm to others, such asthe legal department, maybe the
risk department, and get moreanswers before you go back to
(01:53):
talk with them.
I find that candor andstraightforwardness, eagerness,
and zealousness to fix thingsand fix them quickly in a proper
way are how I would address itinitially.
B ut t here a re cases wherethey're wrong, and decisional
facts will help you supplementthat.
Patrick Dennis (02:13):
I have had incidences where we got a Wells
notice from FINRA aboutsomething and we took a week's
worth of testimony and things onvarious issues.
It was pretty easy to explain,saying wait a minute, you
totally missed this.
We talked about this during thetestimony that these were just
journal entries.
(02:33):
They weren't actually trades.
They were sort of dividends thatwere reinvested, and things like
that.
So this trading activity thatyou're complaining about or
you're concerned about didn'treally occur.
A nd there are times whenthere's a misunderstanding by
the regulators or by the firmsas to what the issue is, and
things like that.
It's always important to makesure that you understand what
(02:54):
the concern is and youunderstand how to explain it the
best you can.
But Ed, your thoughts on dealingwith the violations?
Ed Wegener (03:04):
I think that's spot on because I think there's
really two determinations thathave to be made by the
regulators, right?
The first is whether there is aviolation and the second is, if
there is a violation, what arewe going to do about it?
Those are two really separatediscussions here.
To your point, there are severalpoints during the examination
where you can provideinformation to help to make that
(03:27):
determination of whether thereis or isn't a violation.
It starts to, to Jeffrey'spoint, when the examiners first
start talking about it, beforethere's an exit conference,
before there's an examinationreport that's issued, they're
going to let you know throughoutthe exam, whether there's
something that they see, andstart gathering information
about it.
So at that point, you want toprovide them as much information
(03:48):
as you can to help show themthat we don't think that there's
a violation or again, toJeffrey's point, there is a
violation and we're starting totake care of it.
Then there's a lot of levels ofreview that happens.
So that's one thing- that I'mnot sure people appreciate- is
just t he number of levels ofreview that go on throughout the
course of the examination beforethere's a final determination
(04:11):
and examiners will turn it intotheir managers who review it.
If it's something where there'sa violation that that looks like
it might be referred toEnforcement, senior management w
ill usually take a look at it aswell.
So there's a lot of points ofreview, and those are also
opportunities to get in front ofthe regulator and plead your
case.
But once it's been determinedthat t here's a violation and
(04:33):
that there's evidence thatsupports the violation, the
question becomes,"So what areyou going to do about it?" And
at FINRA, and this is similar, Ithink to what the other
regulators do, we h ad differentthings that we could do, some
formal actions, some informal,so t hat exam could result in No
Action being taken.
It can result in a letter ofcaution where we identify, these
(04:53):
are the issues that are found,show us how you're going to fix
them.
There were some cases whereFINRA would hold what we called
corrective action meetings,where it was something that was
probably more egregious than aletter of caution would resolve,
but didn't feel like it wassomething that should be
referred to Enforcement.
So they might call the f irm into have a discussion about it
(05:16):
and discuss how the firm's going t o resolve the issue.
If none of those things work ordon't appear to be appropriate,
then the determination is madeto refer it to Enforcement.
The factors that are consideredare, they'll take a look at the
violation and look to see andweigh aggravating factors and
mitigating factors.
(05:37):
Things like, was their customerharmed?
Was their intent to harm thecustomers?
Were the firm's procedures andsupervision good, or were they
poor?
When this was raised to thefirm?
What did they do about it?
Did they take action?
Did they dig their heels in andargue about it?
All of those factors go intomaking the determination of
(05:59):
whether to refer a matter toEnforcement.
And there were a couple ofdocuments from FINRA's
perspective that I would lookto.
One, FINRA issued an Enforcementguiding principles document,
which outlined some of thefactors that they look to when
making those determinations, butthen also something that was
recently amended, o ur F INRAsanction guidelines.
(06:19):
In those sa nctioned guidelines, they ou tline a
ggravating and mitigatingfactors based on by violation.
So you can see what are thespecific things that regulators
wi ll l ook at when determiningboth sanctions, but also whether
to make a referral toenforcement.
Patrick Dennis (06:34):
One of the things that we've all talked
about in preparing for this, issome number of firms that think
everything, every violation isgoing to turn into Enforcement
referral.
And frankly, we know that's notthe case.
The number of exams that turninto Enforcement or Enforcement
referrals or Enforcement actionsis really pretty small, at least
(06:54):
from my experience, and I thinkeverybody else agrees.
The other challenge is t hatthere are a lot of steps before
we get to Enforcement orreferral.
You guys correct me if I'mwrong, but there are deficiency
letters that require correctiveaction or a corrective action
statement that's required.
I don't know if they're stilldoing compliance conferences,
but they used to you in and havea conference with you, discuss
(07:17):
the issues and concerns, andthat those are much more
prevalent.
An informal referral is sort ofthe almost final step in the
process, if they have some veryserious violations and de
ficiencies.
Jeff, did you have something toadd?
Jeffrey Hiller (07:33):
I would agree that there are many, many steps
before you would ever get to anEnforcement action.
If it arises from the course ofan examination and they have an
issue that they've decided ortold you, they're going to refer
to Enforcement.
I think that before that time,you would have had a lot of
opportunities to probably steerit in a different direction or
(07:56):
at least to make sure that theyhave all the information they
need.
Bill Reilly (08:01):
Patrick, if I can add a couple of things, maybe
from a state perspective?
One of the things, and I'm notsure a lot of people in the
industry are aware of this, isthat, the SEC is able to enforce
of course, SEC and FINRA rules,and FINRA has certain
regulations, but one of thethings that a lot of States do
is adopt FINRA, SEC, MSRB andNAASA model rules and
(08:26):
guidelines, as well as statestatutory references for each
individual state.
So one of the things that needsto be clear is that a state can
bring an action based upon astate law, a f ederal rule, t he
regulation, SEC regulation, MSRB regulation.
So that's something, to makesure you understand the
(08:50):
jurisdiction of the regulatorthat you're dealing with.
And think one of the otherthings that's really important-
understand, meet thoseregulators, because there were
many people in the industry thatknew me, and they would feel
very comfortable calling me.
Ed, you kind of mentioned thesituation of people reaching out
(09:12):
there from the regulatory sideor from the industry side to the
regulator.
And I can tell you many timeswhen examiners were conducting
exams or investigations, theywould bring attorneys in.
They would bring consultants in,very much like us here on the
panel today, and the one thingthat people would say before you
get to that point of resolvingthat case is, we want to have
(09:36):
the opportunity to come in andtalk to you.
We want to meet with you.
We want to make sure that we'reall at the same understanding,
want to make sure that ifsomeone did not provide a record
to you and we can correct that,we want to do that.
So I think it's imperative toknow the rules o r regulations,
but it's also important, if youcan, to know who the players are
(09:59):
because, as Ed said, most casesw ill end up in a cautionary or
deficiency letter, a largepercentage of cases will end up
in a formal, but a negotiatedsettlement.
And very few cases actually goto administrative proceeding.
That's just the way the processworks.
(10:20):
So understand rules,regulations, processes, players,
and people.
That's my recommendation.
Ed Wegener (10:28):
No, just to your point, and I want to emphasize
this, is there have been anumber of times that I've been
involved with where somethinglooked like it was going to be a
violation and maybe anenforcement referral, and even
late in the game information orevidence is provided that says,
(10:49):
"Hey, either this isn't aviolation or it might be a
violation, but has significantmitigation that we've changed
our minds." So I would neverforeclose on reaching out to the
regulators, providing whateverinformation that you think would
be helpful, because they don'twant to be at a hearing and have
that information come at thatpoint.
Patrick Dennis (11:09):
I would agree.
And I think we all havediscussed to some degree that
the fact that the examiners andthe people that you deal with in
the field don't necessarily havethe final say on what's going to
happen or what the outcome'sgoing to be.
But you occasionally will getsome pretty zealous examiners
that think everything is a majorissue and a major problem, but
(11:30):
gets back to the more seasoned,experienced folks at the office.
A lot of those things get toneddown, or I think reduced the
severity and the consequences,and all of that.
There is some logic and someappreciation for talking to
supervisors, asking to talk toan examiner supervisor, asking
(11:53):
to take things up the chain.
If you really have an issue youfeel strongly about, or you
think you're being mistreated,it's not the right word, but if
you think you're beingmisunderstood or you think that
there is a serious difference inwhat you think the rule requires
and what the examiner does, it'ssometimes it's worth going to a
supervisor, asking to talk to asupervisor and dinging up the
(12:13):
chain before it gets too faralong.
And that's an issue that I thinkwe've all dealt with.
Evan, your thoughts on that?
Evan Rosser (12:20):
Examiners in the field conducting the examination
are rarely going to give you anycertainty as to any findings at
that stage.
As everyone here has pointed outit, even an exam deficiency goes
through a process by which it'sreviewed.
(12:41):
Nevertheless, that examiner inthe field is the person giving
the information to the people upthe line.
When you get an indication thatthat examiner might have found a
problem, and you can tell by thequestions by the documents, by
the follow-up, whether thatmight be the case, I think it's
then you need to say,"Look,maybe there's something else
(13:04):
here I can explain to you,"because maybe your best defense,
your best explanation, is not inthose written documents that
they've you've produced andthey've requested.
Now, it'd be great if that's thegoal, but sometimes your best
explanation is outside thosedocuments and you need to make
the examiner aware of it.
(13:24):
That story goes along up theline.
And ideally, maybe that possibledeficiency doesn't go up the
line.
If you can shut it down duringthe exam process, the one
question or the one issue thatI've heard for years from firms
about examinations, is they saythe examiner doesn't understand
(13:45):
my business.
I have to take my time toexplain my business to the
examiner.
Well, that's not such a bad ideato explain your business to the
examiner.
In fact, it's a pretty goodidea.
And sometimes the examiner willask questions just to hear you
explain it.
It's not that they may not knowit or understand it, but they
want you to explain it to them.
(14:07):
So, if they want you to explainyour business, I would, rather
than heave a deep sigh and rollyour eyes, take the opportunity
to explain it and to provide theexplanation that puts your
business and your program in thebest light.
Jeffrey Hiller (14:24):
I think it's a good point.
I would say some of the initialmeetings I've attended with the
regulators, I generally had myCEO of whatever asset management
company I was working for comeinto the initial meeting to say,
we want to cooperate to set thetone.
I have also seen circumstancesor been involved in a
circumstance where the legaldepartment decided to fight
(14:48):
something with the documentproduction and made it worse.
What didn't necessarily have to,ended up in an Enforcement
action.
They took months and months andmonths because they said they
were reviewing emails, and thenwhen the examiners got the
emails, it was readily apparentby what was in the emails, with
(15:11):
pornography advertisements andeverything, that they knew that
the firm wasn't being straight.
And so it's a delicate balanceas to what you have to do and
the way you do it.
Ed Wegener (15:23):
You know, I've seen firms that have done this really
well, where the examiners wouldcome in on the first day and
they would sit down with themwith a PowerPoint presentation
and explain the firm, theactivities they were involved
in, the products they sell, howthe firm was organized, who did
what.
It took a little time.
But to the earlier point, youwant the examiners to understand
(15:48):
your business, because if theyhave violations, you want them
to be able to put that in thecontext of what you do.
The other thing too, is itstarts the examination off on a
positive, now that you're thereand you're going to help them.
You also then really own themessage because you're
explaining to them what the firmdoes, as opposed to them, trying
to figure it out on their own.
(16:09):
So to the extent that you can dothat and educate the examiners
at the beginning of the exam, Ithink i t definitely a benefit
and I think w ill really go along way.
Patrick Dennis (16:20):
One of the things that, when you were
talking about explaining yourfirm or explaining what you do
and things, I was the CCO for afirm that was wholesaling
structured products andstructured notes, right?
From the get go, we got an examsix months after the firm got
registered.
I spent a while explaining tothe examiner how we actually
operated what we did, how thefirm did it, all of those sorts
(16:44):
of things.
So if your business lines are alittle unusual or a little
different, or relatively new orsomething, that's not day-to-
day sort of operations, you maywant to be prepared to explain
to the examiner what yourbusiness is, what your business
model is, why it works, whyyou're exempt from submitting
stuff for advertising, becauseit's all internal use.
(17:05):
Only those kinds of things.
I went through a lot of thoseissues.
They had that and had we notgone about it with the idea that
we were going to explain it andcooperate and everything else,
that exam could have gone verydifferently.
It turned out to be verysuccessful, very few minor
issues, but a lot of it wasknowing upfront that we were
(17:27):
going to have to do a lot ofexplaining, to make sure that
they understood because it was arelatively new business model at
the time that we did it.
Jeffrey Hiller (17:34):
I've heard a lot of people say that they have to
educate the SEC or FINRA, orwhoever comes in, and I will say
that many of the firms that Iwent to or worked with, it could
take me a year to understandtheir business because it was so
complex.
They might've had sub-advisorsand little boutiques.
So I would approach explainingthe business to the examiners as
(17:59):
an opportunity to steer them towhat the culture is and what the
business really does.
It's not that simple from theoutside, looking in.
Patrick Dennis (18:08):
Thanks for listening and join us again on
our next episode, where wediscuss cooperation with the
regulators and the importance ofculture.
Oyster (18:26):
Thanks for listening, and if you like what you heard,
make sure to follow the Oysterstew podcast on whatever
platform you listen to.
If you'd like to learn how wecan help firms start, run,
protect, and grow theirbusiness, visit our
website@Oysterllc.com.
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