Each year, or every couple of years at offices on a lighter schedule, your home office (or branch manager/office of supervisory jurisdiction) sends out an auditor to go over all of your files.
Typically, the auditor is friendly and seems quite keen to help you improve. She may have an idea about how to streamline your processes or she might need to explain a recent rule change and how to best comply. Depending on the size of your firm, she may take you out to a meal and catch you up on the latest from the home office.
However, it is important to remember why the auditor is there. The auditor, no matter whom it may be, is conducting the audit on behalf of your broker-dealer. The auditor's objective is to identify violations of firm procedures, Financial Industry Regulatory Authority Inc. rules, or any other mistakes that you might inadvertently be making. This is helpful to you and your business when you need to correct course from minor violations. However, if you have made a more serious error, it's imperative to treat this visit with caution.
Let's use an example in which you accidentally failed to report a private security transaction (PST) prior to investing. Now the auditor finds evidence of the PST in your files or email. What you tell the auditor will be recorded in her notes.
When you receive a written audit letter with a deficiency related to the PST, you will be required to respond in writing. Your verbal and written responses may seem to be inconsequential, as they are directed to your firm and the auditor is a nice person. However, should the firm decide to draw the line at this offense, and it decides to terminate your relationship over this issue, those previous statements become very important.
While you may not know it at the time when you are responding to an auditor, what you say and do when asked about a perceived violation may haunt you for months or years to come.
After an employment separation for any reason other than "voluntary," your Finra Form U5 will be updated with some detail of the cause. Finra has a team of investigators who will review the reason for the separation. Often, the investigator will send an information request to both you and the firm. The firm will provide the auditor's notes from her conversation with you and any written response that you provided.
The results of the investigation can go one of two ways: Either no action will be taken, because the documents are clear and defensible, or the investigator will forward your file to Finra's Department of Enforcement. The result of the investigation will largely determine the cost and time you will need to devote to rehabilitating your career.
Once the issue has escalated to enforcement, the chances that you will be sanctioned are dramatically increased. How you respond to enforcement will determine the extremity of the sanctions that are ultimately imposed.
Because your response to an auditor is so important, you sometimes need assistance. As an attorney, I cannot count how many times my colleagues or I have bemoaned statements made before we became involved that we now have to overcome. How do the proverbs go? "An ounce of prevention" or "a stitch in time"?
A negative event can escalate quickly, from responding to an internal audit, being under internal review, being terminated, being investigated by Finra, responding to an information request, being required to attend an on-the-record (OTR) interview, or negotiating sanctions via an acceptance, waiver and consent settlement (AWC).
No matter where you are in the process of a negative event, having an experienced attorney on your side can positively affect the end result.
Michelle Atlas is a licensed attorney at AdvisorLaw who has held both compliance and sales positions at both large product companies and independent broker-dealers.