When examiners from the SEC or FINRA pay a call on a firm, they expect the business leaders and compliance employees they meet with to be open, honest and upfront with them.
It may sound obvious, but a pair of officials from the regulatory bodies recently described some of the challenges examiners can face in the field when firms try to stonewall them.
"From our perspective, we want the interviews to be fluid. We want it to be open communication. We want it to be a dialogue where we're not tripping over acronyms or kind of insider terms that the firm uses," says Kevin Goodman, national associate director of the broker-dealer examination program at the SEC's Office of Compliance Inspections and Examinations.
"I know you all have to get advice from your legal counsel either internally or externally about how to do this," Goodman acknowledges. "But I would suggest that it wouldn't be the best approach to say -- you know -- go in and very narrowly answer the questions, don't volunteer anything, particularly if you're not trying to keep something from our attention."
FINRA has a similar perspective. No one relishes an audit, but Bill Wollman, FINRA's executive vice president of member regulation, cautions broker-dealers that they can help their own cause by playing it straight with the examiners.
"Our examiners know when they're getting answers that are different or not fully disclosing information," he says. "I think it is important to have people understand [that] it'll be much quicker and less painful if we just kind of have a good open dialogue."
Both officials emphasize that they want practice exams to be a collaborative process rather than an adversarial one, and note steps they have taken to ease the burden on the firm.
At FINRA, for instance, Wollman says that whereas in years past, a firm might first hear from the regulator two or three weeks in advance of the exam, officials are now commonly giving notice 60 days or even 75 days ahead of time.
"It's really changed a lot," he says. But in exchange for that long lead time, FINRA expects firms to provide requested data and documents before the examiners arrive on site. That process, which helps sharpen the focus of the exam, has now been digitized through FINRA's Request Manager, a secure, encrypted two-way portal for examiners and firms to exchange information. "We don't really send letters anymore," Wollman explains.
At the SEC, Goodman says that examiners are insistent in their requests for information, though he notes that they are also sensitive to the challenges business firms face in producing documentation, and that the commission is receptive to alternative approaches that might be easier for the firm's compliance team.
"I don't think of it as a negotiation. In other words, if something is in our scope, we're pretty determined that we want to look at that, we want to be able to meaningfully analyze it," Goodman says. "But we do want to have discussions about how burdensome is something. Is there something else that might be less burdensome that would allow you guys as regulators to answer the questions you're seeking to answer?"
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