Independent Third-Party Reviews: An Important Tool in the Resolution of Regulatory Exams and Investigations

 

Independent third party reviewAn effective means to resolve an open examination or enforcement investigation is pursuant to a negotiated settlement with a regulator requiring the services of an independent third party (“ITP”) review. The goal of these reviews is to provide the regulator with a level of comfort to ensure future compliance by the firm.

Regulatory settlement driven ITP reviews generally occur
in two ways:

  1.  As a result of a negotiated settlement of issues identified during a regulatory review, the settlement terms could include a requirement that the firm obtain the services of an ITP to review and make recommendations for the firm to adopt and implement. The settlement terms can require that:
  • the ITP not have a contractual relationship with the firm, generally for two years;
  • the ITP must not be objectionable to the regulator; and  
  • the ITP will provide within a certain timeframe a written report with recommendations to the firm and the regulator, with the firm being required to adopt and implement all “reasonable” recommendations from the report.
  1. As an alternative, the firm and its legal counsel, during the time in which the regulatory review and/or settlement negotiations with the regulator are happening, may reach out to an ITP (in many instances a consulting firm and consultant) to conduct the review. ITP services may also be retained by firms seeking a review who have not retained legal counsel. Upon completion of the review, the ITP will complete a written report noting the recommendations, including additions and updates to the policies and procedures that have already been adopted and implemented by the firm. A copy of the report and the adopted recommendations will be submitted to the regulator during the negotiation process.

In either scenario the goal of the ITP review is to address the concerns of the regulator by conducting the independent review and the subsequent adoption and implementation, including, among others, of recommended new/updated policies and procedures.

The pre-settlement review may place the firm in an enhanced negotiation position based upon written (FINRA, State of Florida) and unwritten (SEC and other states) sanction/disciplinary guidelines for assessing penalties for securities violations. It should be noted that NASAA has adopted “considerations” for states to utilize when settling regulatory concerns with broker-dealers. These guidelines utilize aggravating and mitigating circumstances provisions to increase or reduce penalties.  In a scenario where a firm has completed an ITP review and has adopted and implemented the review’s recommendations addressing the regulator’s concerns, which is a mitigating circumstance, prior to the adoption of a final settlement document the firm may have enhanced its settlement position and negated the need for a post-settlement ITP review.

Oyster Consulting provides ITP services in both pre- and post-regulatory settlement engagements. For more information about how Oyster can help your firm with ITP services, click here or call (804) 965-5400 and one of our Relationship Managers will be happy to help you.

About the Author: Bill Reilly acts as an independent third party in reviewing firm activity prior to and as a result of regulatory actions and settlements. He has been retained as an expert witness by law firms representing industry participants in arbitrations and regulatory matters, updates policies and procedures for both broker-dealer and investment advisers. Bill also leverages his examination expertise and relationships with state and federal regulators and self-regulatory organizations to guide broker-dealers and investment advisers through both proactive and reactive regulatory processes and compliance issues. Among other services, Bill conducts FINRA Rule 3120, Supervisory Control Reviews, Annual Compliance Reviews for federally and state-covered investment advisers, and creates and/or updates policies and procedures for opening and monitoring senior and vulnerable adult client accounts.