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The rise in regulatory fines

How FINRA compliance consultants ease enforcement action outcome

Regulator examiners are focused on deterring fraud and uncovering supervisory failures, but aren’t expected to draft tailored compliance programs and procedures for a firm. Firms that need this type of assistance reach out to qualified FINRA compliance consultants for guidance. Additionally, FINRA experts are often called upon by either firms or regulators to supervise remediation efforts and monitor on-going compliance activities.

Benefit of hiring a FINRA consultant to assist in remediation

FINRA compliance consultants improve enforcementOne of the benefits of on-boarding a compliance consultant to resolve a violation is having them communicate directly with the regulatory examiner. A consultant with appropriate credentials, such as a General Securities Principal Series 24, can directly communicate procedural changes to enforcement examiners while providing an added sense of relief to the firm’s managing members and confidence for the regulator. Additionally, if new business practices are recommended, the business owner may benefit from better devised solutions through an expert in compliance, rather than an examiner who’s focus is limited to regulation and not hands-on compliance supervision.

Regulators realize they get a benefit from member firms who employ FINRA or SEC consultants in resolving their remediation concerns and value the partnership. Regulation consultants have expertise that extends beyond resources of regulators, which increases examiner confidence. Use of a compliance expert often demonstrates to regulators that the firm takes the violation seriously and is committed to improving. Most firms find, outsourcing to a compliance firm outweighs the cost by getting matters settled sooner and with less frustration. Managing partners also benefit by eliminating uncertainty in interaction with the examiner, so they can focus on assuring clients and helping the business recover from negative press or otherwise.

In some instances, a regulator will require a compliance expert for remediation and on-going monitoring. Settlement may include reviewing transactions, determining whether responsibility lies upon officers or employees, and uncovering additional victims.  Delegating this responsibility onto the compliance consultant does not come lightly. Regulators will seek complete independence between the parties. Restrictions of working together in the past and/or future will be part of the agreement; to ensure conflicts of interest are eliminated.

It’s possible the compliance firm may be asked to enforce the necessary settlement reparations. They may take on the responsibility to calculate and release agreed disbursements for the firm. This gives the regulator confidence the settlement shall be paid under the terms of the enforcement agreement. In such cases, the compliance firm is generally required to submit a report to the regulator showing proof of activities on a scheduled basis. By assigning these tasks to a compliance consultant the regulator can move on to other cases needing attention without the work of verifying receipts or calculating damages. When a mandated restitution is expected to be resolved over several months or a few years, outsourcing to a consultant can significantly shift the burden away from examiners and make life for the firm easier as well.

In some cases, regulators run a risk by mandating support from a outsourced compliance expert. Compliance consultants look at policy and procedure compliance from a perspective that differs from the view of examiners. Occasionally a compliance professional will interpret the degree of egregiousness different than the examiner. The compliance professional may assert the examiner was too strict in applying the rule, or even too broad. These types of discrepancies may delay resolution of an enforcement case until resolved. Therefore, it is important to work with a compliance consulting firm with strong experience in enforcement matters that knows how to demonstrate their own assessment clearly to regulators if necessary.  A seasoned compliance professional may even be able to draw a conclusion that sanctions imposed by the regulator are disproportionate to the level of misconduct. In this type of situation, it is important to have a solid team of compliance professionals advising your firm before coming to a resolution agreement.

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Does your FINRA, MSRB, or SEC member firm need assistance navigating remediation for an enforcement action or exam? Our professionals are highly experienced with regulatory rules. We develop policy and procedure manuals for Broker-Dealers, RIAs, Municipal Brokers, Private fund managers, and more. Our expertise is vertically integrated compliance solutions for firms; bringing business planning, operations, trading, and registration. RND professionals provide –

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  • Full service brokerage support
  • On-site audits
  • Expert regulatory consulting
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Rules and Regulations

Guide to SEC Use of Independent Compliance Consultants

Regulators rely nearly every day on independent consultants to monitor member firms entangled in enforcement cases. Leveraging independent consultants for oversight of a firm improves efficiency of regulatory organizations by freeing up auditors to review more cases. The consultant may be required to handle any number of tasks in order to fulfill remediation.  Services of the consultant may be required for a set number of months or years. Proactive firms reach out to consultants while they’re in preliminary stages of an enforcement case as a show of good-faith effort in remediation, and to prepare policy and procedure solutions that they plan to present to the enforcement agency.

Rules and RegulationsFrequent ways Independent Consultants are used to resolve enforcement and compliance issues

Below are examples of common requests by regulators when calling for an independent consultant to provide oversight in the remediation terms:

  • The Independent Consultant will be retained for a set number of days or months
  • The Independent Consultant is approved and acceptable to the staff of the Commission
  • The respondent member firm bears the entire cost of the independent consultant, including compensation and expenses.
  • The Commission will require an engagement letter from the Independent Consultant detailing duties and responsibilities as required by the enforcement order.
  • A description of the independent consultants’ duties must be outlined including; review written policies and procedures; make recommendations concerning policies and procedures; assure the compliance program is effective as well as supervisory procedures and policies and procedure manuals; ensure the respondent is complying with the specified enforcement remedies.
  • Usually there is a mandate requiring the respondent and Independent Consultant work together in good faith.  They must attempt to reconcile disagreements and where the two parties cannot come to an agreement, the respondent may often be required to revert to the original recommendation made by the independent consultant.
  • The consultant engagement will specify the independent consultants obligation to the enforcement staff such as; issue a report and submit a copy of the report to the commission describing the review performed, conclusions reached, and recommendations.
  • Typically there will be a specified amount of time, such as 30 days, in which the respondent shall adopt recommendations contained in the independent consultant report. If the respondent disagrees with proposed recommendations is they may communicate in writing to the Commission to request a review or suggest an alternative policy or procedure.
  • The respondent in an enforcement case is of course required to cooperate fully with the independent consultant and provide access to files, books, records, and personnel.
  • An affidavit stating recommendations have been implemented is often required, and usually subject to a deadline such as 180 days. Also a provision is made for recommendations that have not been implemented and an explanation.
  • An independence agreement is generally required where the respondent and independent consultant may not otherwise be affiliated in any way. They are often barred from entering into an employment agreement, audit engagement, or otherwise consulting or attorney relationship with each other in any capacity for a set time; including agreements with affiliated member firms, directors, employees, or agents.
  • While the above are common requirements when the Commission uses Independent Consultants in the remediation process, there may be many other terms deemed appropriate for your enforcement situation. Other terms may include; private meetings with staff, requirements of documents to be provided to the commission, full access to all records requested by the consultant.

Does your FINRA, MSRB, or SEC member firm need assistance navigating remediation for an enforcement action or exam? Our team of professionals are highly experienced with regulatory rules. We’ve developed policy and procedure manuals for Broker-dealers, RIAs, Municipal brokers, Private fund managers, and more. We develop vertically integrated compliance solutions for firms that encompass business planning, operations, trading, and registration. We provide –  

RND Resources Brochure

Click here for our company brochure

  • Full service brokerage support
  • On-site audits
  • Expert regulatory consulting
  • Customized compliance programs
  • Registered principal services (FINOP   CCO   Municipal)
SEC Enforcement Action 2008 thru 2016

Independent Compliance Consultants as a Remedy in Regulatory Cases

SEC Enforcement Action 2008 thru 2016Independent Consultants are frequently mandated as part of the remedy in securities enforcement actions. The SEC and SRO’s like FINRA and MSRB recognize the value of having an independent compliance consultant monitor or perform specific tasks related to a case and ensure corrective action is being applied appropriately. The tasks are generally outlined in the settlement agreement and can include a number of months or years a Broker-dealer or RIA may be required to retain services. In such cases, regulators describe the independent consultant as a; compliance consultant, disbursement consultant, or monitor depending on their prescribed use.

 For the most part regulators are relying more and more on the resources of consultants for obvious reasons.  Leveraging consultants reduces reliance on limited regulatory resources and frees up staff for new cases. Consultants are also able to handle tasks more efficiently where regulators are not designed to, such as cash disbursements or re-writing policies and procedures. Regulators may even request a detailed analysis of a firms’ compliance program by an outside consultant as requisite to completing remediation.

Respondents (defendants) in a regulatory case are naturally concerned about the cost of consultants, as the expense is out of pocket, but many firms agree independent consultants are generally less expensive and easier to work with than regulatory examiners. For this reason, often a BD or RIA will request review of their records prior to being fully investigated by Regulators. This allows the firm an opportunity to discover and remedy risks outside of the public eye, and may hopefully improve a firms’ chance of satisfying a regulator earlier and for less of an expense.

If a Regulator requires an independent consultant as part of a settlement, respondents should take care to have the terms and work to be performed by the consultant clearly defined. An overly broad mandate by a Regulator can have a serious consequence on an unsuspecting firm. Given the consultant is independent, they are barred from exhibiting a conflict of interest between the firm and regulator, and are often given leverage to pursue whatever remedy deemed appropriate in absence of clear instructions. With that in mind, the use of a third party consultant can be a very positive remedy to improving the relationship between firms and regulators. Often regulators value the expertise of consultants and their ability to monitor a firm after a regulatory issue has been discovered.

 Firms which are proactive about a regulatory inquiry leading to enforcement may be able to bypass the request for an independent consultant by taking steps on their own to remedy risks before a formal resolution is handed over. Early efforts by respondents demonstrate to a Regulator that the firm understands the depth of the problem and takes remediation seriously. Some steps a firm may take include; investigating and reporting problems whether they’ve been identified by the Regulator or not, and demonstrating remediation by making a voluntary restitution or adopting new policies to prevent future occurrences.   These steps can also provide a basis for reduced fines, sanctions, or suspensions.

Firms faced with a regulatory inquiry should understand that Regulators can impose “any equitable relief deemed appropriate or necessary”. This may include; providing restitution to persons harmed, revising procedures, ceasing certain business activities, and more. Requiring the resources of an independent consultant is frequently considered an appropriate course of action to ensure a complete remedy. Thus, while independent consultants are not explicitly authorized by regulators at this time under specific licensing, they are a frequent sought for their expertise and ability to develop sensible solutions in remedy enforcement cases.


 

Is there a regulatory inquiry or issue you are concerned about?  Our staff has helped numerous firms subject to inquiry and examination.  We’ve assisted law offices across the US working with Broker-dealer, RIA clients, and other financial service businesses. Our services include providing expert testimony, analysis of records and remediation; as well as outsourced compliance and principal support on an interim or month-to-month basis. We’re happy to work directly with financial service firms, their attorneys, CPAs, investors, shareholders, and liaison with Regulators. Visit our services menu for more information.

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