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 –  

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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.

Reach out to us for a confidential discussion of your business and we’ll see what we can do to help. If we’re unable to assist, we’ll try to find a suitable resource for you.

FINRA Compliance

2016 SEC Priorities Letter

Standing by its commitment to provide transparency and share information with industry registrants; the SEC has released 2016 examination priorities from OCIE, Office of Compliance Inspections and Examinations.

According to Marc Wyatt, OCIE Director, “We hope that registrants will use this information to [evaluate] their own compliance programs.”


New areas this year they will focus on include

Read more

RIAs take advantage of lax rules

Susan Axelrod: more brokers are migrating to the RIA landscape where regulatory requirements are relaxed

Susan Axelrod, executive vice president of regulatory operations for Financial Industry Regulatory Authority, Inc. say’s she recognizes some brokers are opting out of the brokerage business and moving toward RIA licensing to avoid the stress and burden of frequent exams.

RIAs take advantage of lax rules

Brokers feeling buried under reporting requirements for examinations and personal activity questionnaires are overwhelmed by costs to maintain a compliance department for regulatory compliance.  As more and more firms find exams time-consuming and stressful, it stands to reason that some would breakaway and join the RIA channel.

A concern is whether investors are at a higher risk because of the lax RIA regulatory landscape.  Given the influx of new entrants  simply to avoid regulatory reporting, there should be cause for concern. Certainly, investors can be well-served in either channel, but the fact is, the SEC examines RIA’s under their jurisdiction on average only once every 10 years. SEC Commissioner Daniel Gallagher recognizes there are more advisers in the RIA landscape violating the law than are being caught. In a speech earlier this year he indicated; “we’re just not finding them quickly.”

So an easy solution would seem to be to increase the number of exams for RIA’s. However, implementing this practice is costly and the SEC has yet to convince Congress to authorize additional funds for management.  As an alternative a self funded third party management idea has been tossed about.  One: allow a third-party to manage the exams of RIA’s; and two: implement fee based exams where RIA’s pay to have the exams done. Again, implementing any new plan could take a few years to develop.

Meanwhile, many feel the America public has waited too long for the government to fix the problem. It’s time to start working on a solution and not just bandying ideas about.

What do you think, should exams for RIA’s be just as frequent as they are for brokers?


RIA’s vs Broker-Dealer  what’s the difference?

Fiduciary Responsibility vs. Suitability Rule

RIA’s are subject to Fiduciary Responsibility. They must put client interests above own and declare any conflicts of interest.

Brokers are subject to Suitability Rules.  FINRA’s suitability rule states that firms and their associated persons “must have a reasonable basis to believe” that a transaction or investment strategy involving securities that they recommend is suitable for the customer.


Commissions vs Fees

RIA’s are paid an advisory fee directly from the client for advice and service, usually a percent of assets under their care, but sometimes a fixed fee. 

Brokers are paid commission based on investment transactions made on your behalf. 


Disclosure Rules

RIA’s provide clients with quarterly reports showing the change in portfolio value and fees charged.

Brokers must follow rules for legal disclosures, by providing prospectus booklets and required documents.



RIA’s work closely with clients; helping to manage their assets. They typically charge based on a percentage of the assets they manage and maintain transparency in dealings to avoid conflicts of interest.

Broker-dealers facilitate investment transactions. They receive a commission based on investment transactions. They  generally cost less in fees and the relationship is well-suited for savvy investors who research and oversee their own investments.

Read more news about regulatory compliance standards for RIA’s and Brokers.