There is no question that SEC and FINRA exams are intimidating, but, with proper preparation firms can be more than ready.
During a Financial Planning webinar addressing audit readiness, Brian Hamburger, founder and president of MarketCounsel, a leading business and regulatory compliance firm, and Robert Molinari, vice president of compliance at Commonwealth Financial Network, laid out some best practices for preparing for regulatory audits.
Readiness won't come from cramming at the last minute, Hamburger says. Preparing for an audit is a lot like preparing for an annual physical, he adds. "The time to prepare is not the day before or the week before," Hamburger says. "It's an ongoing process."
Instead, Hamburger suggests making regulatory and compliance standards "part of the operational fabric" of your firm.
READ THE LETTERS
Although it can be difficult to know exactly where regulators will focus their attention, both FINRA and SEC exam priority letters give advisors a good idea of what to expect. These letters provide a way to gauge what regulators will be checking out.
This year's SEC letter is particularly illuminating, Hamburger says. "It's much more concise than it has been in years past," he says. "It has less priorities and gives fewer information
but [the information] is more accurate."
The same can be said for FINRA's letter, according to Molinari. "It really was a roadmap as to what the FINRA exam team was going to focus on," he says.
Common themes among the two letters include protecting clients who are saving for retirement, identifying illegal activity and assuring that clients are receiving the services for which they have signed up.
"When we see where the examiners are spending their time and where they're asking their questions, where they're coming back for further details, it seems to be pretty consistent with their stated examination priorities," Hamburger says.
One of the biggest elements of making sure that the firm's team is prepared for an audit is establishing how they should behave around regulators. "One of the things you do prepare for is sitting down and coaching anyone who may sit down in front of a regulator," Molinari says.
It is important to coach the team on thinking before they speak, answering questions carefully and knowing when to be quiet. Moments of silence can give clever auditors a field day, Molinari says. During interviews, "there will be periods of times when a regulator is digesting or writing down an answer," he says. Make sure that the staff is prepared to answer open-ended questions concisely.
Hamburger also suggests that all financial advisors familiarize themselves with simple interview techniques, echoing Molinari's point about embracing silence.
"Furnish [examiners] with the answer they ask for, and stop talking," Hamburger says.
"Bring other work, have something else in front of you to pass the time, but don't fill that space with noise," he says. "That noise will be typically used against you."
Both Hamburger and Molinari stress that it is important to know exactly what information regulators are entitled to and what requests advisors can deem unreasonable.
If a request requires more data than can be reasonably provided, Molinari says that it is best to be upfront. "It's good to open that dialogue up in regard to how much data is going to be put out," he says.
[Examiners] "appreciate you filling them in on how much info it's going to be," Molinari says. "They want to have usable data on their own," he says. "Find that happy medium; don't negotiate every request if you think it's going to be too burdensome of a process for you to compile and for them to review, you should let them know."
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