HOLLYWOOD, Fla. -- A slew of recent regulatory shifts is keeping examiners busy -- and advisors must know how to react when they get a call from FINRA or the SEC. "The current regulatory landscape is extremely turbulent after Madoff and the financial crisis," says Joan Schwartz, managing director at Pershing, who led a panel on regulatory exams during the firm's INSITE conference in Hollywood, Fla.
Schwartz notes that the current regulatory landscape is marked by a desire to protect Main Street from Wall Street. "It's also an era of transparency -- and it's one of the most challenging times to be in financial services," she says, adding that recent custody requirements for RIAs and the evolution of advice from purely investment advice to broader functions has led to greater complexities and often difficulties with regulators.
Here are a few things to know when you go into an examination process:
- DON'T assume the examiner knows your business. Educate your examiner, suggests Schwartz and her other panelists. Start with a briefing that will help the examiner understand what business you're in, and what's unique about your firm
- DO communicate clearly with regulators in preparation for as well as during the exam.
- DON'T wait for a problem to turn into a bigger problem. Take prompt remedial steps to address potential findings, even before the examination is concluded. Encourage the examiners to note and include your firm's remedial actions in their final write-up
- DO develop relationships with regulators outside the exam context.
- DO understand jurisdictional lines. This is especially true for dually registered firms or those with multiple affiliates (RIAs, insurance agents, broker-dealer). Regulators may want to look at your business holistically -- particularly FINRA, which has been flexing its muscles in an attempt to expand its jurisdiction. Be aware of jurisdictional boundaries.
- DO escalate -- particularly if you have a fundamental disagreement. For an inexperienced examiner, involving a supervisor may offer a face-saving way to backtrack on a complicated issue. But be extremely respectful, panelists caution. Include the examination team, and be inclusive, candid and thoughtful about the disagreement.
- DON'T give up your internal audit too soon. You don't want to hand examiners a roadmap, panelists say. If regulators ask for internal exam reports, Schwartz says, you want to highlight the integrity of your self-evaluation -- but ask to provide those documents at the end of the exam if you can.
- DO conduct regular status meetings with the examination staff.
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