Sylvia M. Scott on How to Handle a Regulatory Examination

Both the U.S. Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) conduct routine and risk based examinations of broker-dealers. Two types of exams include cause, in which case the agency has reason to believe suspicious activity at the firm, and sweeps, during which the regulators check on specific issues and determine how a cross-section of financial firms handles said issues. The SEC and FINRA also perform routine, or cyclical, examinations which focus on financial and operational issues.

All SEC and FINRA examinations should be viewed as non routine and with the utmost seriousness by financial firms. Firms should adopt formal procedures for handling regulatory exams, sweeps and cause investigations. For example, firms should not permit their employees to submit to “casual,” impromptu interviews by regulators. All firms should have a knowledgeable and professional point person to receive and handle all regulatory requests. This is particularly important as the regulators integrate specialists and experts into the examination process.

Firms should also strive to get ahead of problems and diffuse them should they surface. This may lessen the chance of an enforcement referral or a referral to another regulator.

When faced with a never-ending document request that seems to ask for every piece of paper ever generated by your firm, the firm’s point person may have some success in negotiating an extension if there truly is such a need. For example, with smaller firms, it might be physically impossible to meet the deadline. Usually the staff will grant an extension in limited circumstances provided the firm can detail a reasonable basis for the request. If the staff refuses to grant what appears to be a reasonable request, this can be a signal that the staff believes that they have identified a potential emergency that might require an emergency enforcement action. If this is the case, the firm should immediately contact its counsel.

About the Author:

A Partner at Freeman, Freeman & Smiley, LLP, in Los Angeles, Sylvia M. Scott manages the firm’s Securities RegulationPractice Group. In this capacity, she focuses specifically on securities regulation and litigation. Ms. Scott was formerly an enforcement attorney at the SEC and the NASD, now known as FINRA.

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