Dispute Resolution

Managing Customer Complaints and Regulatory Inquiries

By Ed Wegener, John Ivan and Evan Rosser

Dispute resolution - nails in wood with string

A necessary part of any financial services firm’s business is handling dispute resolution.  Whether it’s a complaint from a customer, litigation, regulatory inquiries and investigations, firms need to have a well-thought-out process for handling these disputes.  In today’s podcast, Oyster Consulting experts Ed Wegener, Evan Rosser and John Ivan discuss

  • how to approach the dispute review
  • how to work with and manage interactions with key stakeholders
  • managing the information gathering process
  • factors to consider when determining whether a complaint has merit
  • keys to an effective investigation

Oyster Consulting’s team of compliance experts understands the importance of having a thoughtful, thorough process for handling customer complaints, litigation, or regulatory inquiries and investigations. Our experts provide compliance support for firms managing disputes. Oyster’s professionals have been engaged to provide expert witness testimony by Federal Regulatory agencies, and both plaintiffs and defendants. They have also served as independent consultants for firms as a result of regulatory action,

Oyster Consulting’s Expert Witness service is built upon a core team of practitioners including former regulators, experienced attorneys and compliance professionals, and operations professionals. Our consultants are current in their areas of expertise because they provide advice and guidance to clients as they work on engagements.  Oyster also provides review and analysis of claims and defenses, litigation support, evidence review and testimony preparation, and as noted, extensive subject matter expertise in all matters related to broker dealers and investment advisers.  Oyster Consulting has been engaged


Transcript provided by TEMI

Bob Mooney:  Welcome to the Oyster Stew Podcast. I’m Bob Mooney, General Counsel for Oyster Consulting. A necessary part of any financial services firm’s business is handling disputes that arise. Whether it’s a complaint from a customer, litigation, regulatory inquiries, or investigations, firms need to have a well thought out process. In today’s podcast, Oyster Consulting experts, Ed Wegener, Evan Rosser, and John Ivan discuss how to approach the dispute review, how to work with and manage interactions with key stakeholders, managing the information gathering process, factors to consider when determining whether a complaint has merit, and keys to an effective investigation. Let’s get started, Ed.

Ed Wegener:  All right. Hello everyone. I’m Ed Wegener, and I am the Practice Lead for Governance, Risk and Compliance at Oyster Consulting. A necessary part of any financial services firm’s business is handling disputes that arise in the course of that business. And whether that’s a complaint from a customer, litigation, regulatory inquiries, and investigations, firms need to have a well thought out process for handling these disputes. I’m very fortunate today to be joined by two of our most experienced practitioners and consultants, Evan Rosser and John Ivan, both of whom have helped clients navigate these tricky issues. We thought that it’d be a good idea to spend some time talking about how to effectively deal with issues, including many of the challenges and best practices that come up when dealing with firm disputes. So why don’t we start with some brief introductions. Evan, why don’t we start with you?

Evan Rosser:  Sure. Ed. My name’s Evan Rosser and before joining Oyster, I was with FINRA. I spent most of my career with NASD and then FINRA in its enforcement department as an expert. Since joining Oyster, I have been a consulting and testifying witness in FINRA enforcement actions, arbitrations, as well as I’ve testified as an expert in federal court. So I do have a great deal of background, both in putting these cases together, knowing how FINRA and the regulators identify their cases and then assemble their cases, as well as serving as a CCO since joining Oyster.

Ed Wegener:  Excellent. Those will be great perspectives. And John, how about yourself?

John Ivan:  Sure. Thanks, Ed. I have been consulting for about six years, and as major part of that practice I’ve served, and I really like the way Evan phrased it, as a consulting and testifying expert, and we’ll talk about those distinctions and how you blend the two, for about five years now. And again, engaged over 50 times, have testified about 10 or 12 times, and submitted, like Evan, written reports in federal and state court, at a number of firms. I served as CCO and general counsel and headed up what we’re going to go into a lot. And that is, how do firms actually structure the way they handle both, customer complaint processes and then, litigation and the need for expert witnesses.

Ed Wegener:  So, why don’t we start when there’s a first indication that a dispute has arisen when a client receives either a complaint or sees a pattern of complaints that require attention. How would you start out in planning the review? Why don’t we start with you, John?

John Ivan:  Sure. So, I use the same process that (I used) when I was in-house heading it up. So the first obvious thing is to understand, what is the client’s philosophies. Are they a firm that wants to quickly deny everything, or do they want a more fulsome review? You can go either way, and it really is up to the client. I think Evan and I will both talk about how we think, the more thoughtful process of really assessing and understanding is the better way to go, but it is the client’s call. Then really just starting, and we’ll go through a number of the steps, but I always want to know where does the complaint or the pattern fit in. There’s kind of recognized categories of complaints, whether they’re product complaints, there’s sales practice, like selling a wave, fraud, or senior investor. There can be either operational or even our providing some services that win awry.  So just understanding what type of complaint we are talking about is really the starting point. And then we’ll go into a lot of things about the review. And of course, if it’s just a single complaint, one of the things we always want to ask first is, are there other complaints by that our registered rep, the branch, or the firm?

Evan Rosser:  Yeah, I would agree with that. There are lots of different patterns that can be detected by complaints. And to take a step back, I think what really is important that a firm has a process to identify patterns of complaints. A lot of firms, unfortunately, will treat complaints as kind of a one-off problem to be handled. And they need to be able to look at patterns and trends that might be emerging from complaints. And, as John mentioned, you can have complaints involving a specific registered rep. You can have complaints involving a branch, you can have complaints that might involve a particular product. And when you identify that kind of pattern, the way that you look at that pattern might depend on what the subject matter is of the complaint.

Ed Wegener:  Well, that’s great. And so once you have that nailed down and you have the start of a plan in terms of how you’re going to approach the inquiry, one of the things that you have to deal with is there’s a number of stakeholders that are involved internally within one of our clients. And that could be the subject of the complaint, the compliance department, internal counsel. To the extent that there’s outside counsel involved, there’s a lot of stakeholders. And how do you go about working with and managing the interactions with each of these stakeholders? Evan, why don’t we start with you?

Evan Rosser:  Well, it really depends on the firm, how they choose to handle it. Depending again on the nature, the subject matter, frequency, number of complaints, it might just be handled internally by a compliance department, or by internal counsel. If there is internal counsel, I don’t think a lot of firms immediately go out to run it by outside counsel. If that is the case though, if you’re working with internal counsel or outside counsel, then the dynamic changes, you’re not going to be able to really claim any privilege for firm documents. But as you analyze those, as you might prepare an analysis or a report on those complaints, if you’re working with counsel, that’s when it’s possible that those would fall under privilege if you’re working under the direction of counsel. So it really depends a lot on the firm, how they’re structured, and what the complaints look like and what the complaints are telling you. What is that pattern telling you about where the problem might be?

John Ivan:  Yeah, II couldn’t agree more with needing to take direction from outside counsel and what they’re going to want to think is privileged.  And sometimes even internal counsel will do the same thing. So that sort of ground rules of, with internal and outside counsel, we could have a whole podcast on how you keep privilege, is really important to set the table. You mentioned a couple of areas in a compliance and counsel and the subject. There’s two more that I always have really high on the list. And one is supervision. What is their supervision structure? Because supervision is always going to come into play, or at least, I think it’s a good practice that it should come into play. And then one that I think has been forgotten quite a bit is if it’s a product case.  You need to have the pro, whoever the firm’s product experts are, you need to have them in very, very early. I’ve had so many times when you were talking with the subject of the complaint and maybe even supervisors and counsel, and then at the very end, the product people came in and said, wait a minute. You know, this is X, not Y. So it’s really important to get that stakeholder in very, very early.

Ed Wegener:  Now, extremely important. And so, once you understand, to your point earlier, John, the firm, and their approach, you have a good plan in place for what you’re going to do. You understand who all the stakeholders are and start working with them. Now the real work begins, and you got to start gathering information and evidence. So, how do you manage that information gathering process, John?

John Ivan:  I’ll give it a start, and again, with the caveat that each firm is kind of different. And probably the first thing is we’ve talked about process already 20 times. There’s actually a really important process that the firm undergoes to actually gather information on their complaints and regulatory matters that come in. So it is really important to understand what the firm does. Who are the contact people? What process do they have as far as files, how they flow, et cetera. Because you don’t want to step on their toes, and you want to know it so you can maybe offer some improvements on it. And then, there again, there’s usually an internal one central person that can go to the stakeholders. And you want to know who that is, because you don’t want, as an outside consultant, to be wasting a lot of time just in the who are the people that we need to get this information from.

Evan Rosser:  Assuming we’re still in the very early stages of putting together a review of a complaint, a pattern of complaint, or some other indication that something might not be working well. You have a lot of issues. Supervision, as John said, some of these are regulatory compliance. Some of these might be personnel matters. And you might find that there’s a personnel problem that you might have an HR involved in dealing with an employee or a rep who might have violated firm policies. You might have an advertising and marketing problem. We’ve seen that in product complaints. The problem isn’t necessarily the registered rep who is simply using the marketing of the firm. That might be a problem. We saw that in a number of cases. For example, auction rate securities, which were often treated as cash, and firms marketed them as cash or cash equivalents, and reps would market them as such.

Evan Rosser:  When that market froze up, they were no longer cash products. And those kind of product complaints went back to marketing at the firm. You also have to consider, is there customer remediation that might be required somewhere down the road. You don’t want to get ahead of yourself in that investigation. But as you start gathering that information and looking at it and pulling it together, I think you have to start considering the potential outcome or outcomes of that investigation. And who are the stakeholders depending on where this investigation leads.

Ed Wegener:  Well, speaking of those stakeholders, Evan, and sticking with you, as part of the information gathering process, one of the things that you have to consider is conducting interviews of relevant people. When would you consider conducting an interview? When’s the appropriate time? And what are some of the keys to conducting effective interviews?

Evan Rosser:  Well, there are, if we’re in the fact-finding stage, and these are fact finding interviews, maybe they’re done early.  If there is an explanation, if there is some reason for the conduct that caused the customer complaint, then you should get it early. Let’s find out what it is that you can look into that.  And I think also that you want to make sure that honestly, interviews can get people defensive, and you want to be careful in doing those. You want to be careful, again, if you’re working under privilege, you want to be careful how you memorialize those interviews. So, they can be a big part of it. And you need to give whatever parties are involved in the complaint, the opportunity to explain what happened.  They’re not respondents, they’re not targets of an investigation. You want to give them every opportunity to give you their explanation for what happened and what was it that caused the complaint.

Ed Wegener:  So it sounds like the interviews can happen at different points depending on the circumstances. The important thing is that you’re strategic in terms of when you think you need to conduct an interview. John, any thoughts around conducting interviews?

John Ivan:  Sure. I couldn’t emphasize more the couple of points that Evan made. One thing that the timing of the interview, and you do want to get in quickly or late, will depend on the later the facts of the circumstances. Because you also want to have the back and the background, so you don’t have to go back in and do more interviews. So, depending on when you’re brought in, firms typically have some set type of process where they, I’ll call it the RR for this call, provide something in writing. Regulators often request that you want to make sure you have all of that. If you’re at the point that there’s been a number of communications that are in question, a lot of times customers will actually attach them to the complaint emails and texts in today’s environment.

You want to make sure you have as good of a record as you can as you conduct the interview. Because again, you don’t want to come back and say, oops, now can you explain this and explain that? Putting as best you can, as Evan said, making sure you have the confidence of the interviewee as best as you can under the circumstances, make them know that you’ve handled these hundreds of times. You know what’s going on. There’s a number of them where it’s their first complaint ever, and they’re unbelievably sensitive. You want to make them as comfortable as possible. And what I personally try to do is just really understand and get them to say how they actually conduct, whether it’s a sales practice, especially when it’s a sales practice. How do they conduct it so you actually know from them that they really do cover the product or have the knowledge of the strategy. And they actually do build in good sales practice disclosures and risks in their processes. And you can get that out of them pretty effectively in an interview. And I think it’s an important factor.

Ed Wegener:  So you’ve collected the documentation, the evidence, you’ve conducted the relevant interviews, and at some point, you’re going to have to start drawing conclusions. What are some of the important factors to consider when determining whether a complaint has merit? And then start thinking about, okay, well, how do we resolve this issue. Why don’t we start with you, John?

John Ivan:  A little list in catalog of what Evan and I both talked about. You certainly want to understand the client, you understand your issue. Of course, understand the client profile. Clients come in all categories, and you can pretty quickly get an understanding of a client and whether they are trying to take advantage of something or do they fall on the exact other end of the category of a very sympathetic and unsophisticated client. So you want to have a good understanding of the client profile. As I said, you want to have a good understanding of the registered rep for this podcast, could be advisor, understanding of really what is their sales practice stance and how you understand that and is there supporting documentation that goes along with it.

It’s always great when they not only have a very good practice, a good story, a solid story, but there’s the documentation that backs them up. So it’s not just a ‘he said, she said’, or ‘he said, he said’. And then understanding, were there any problems with supervision or compliance posture. Is this a big regulatory issue? Is it, as Evan said, the next auction rate? And where does the firm stand?  You do want to know as best you can, what’s the damages risk. What are we talking about here as far as a damage perspective, and then just sort of with that client profile, et cetera, just an understanding of if we are going to make what we think is a reason, denial, what is the likelihood that we might face in arbitration or lawsuit if we take that posture. So I think those are some of the common ones I think about. I’m sure Evan’s got some others.

Evan Rosser:  No, I think you touched on them, John.  Documentation is clearly going to be very important. There are going to be complaints, maybe a lot of complaints.  You’ll never know exactly what happened. I mean, you just don’t know. And that’s why, to the extent that you have emails, you have other documentation of what happened is critically important. And there’s no better determination there. There’s no better tool to determine the merits of a complaint, but a lot of times you won’t know the merits necessarily. And you’ve got to look at were procedures followed. Did the rep follow the procedures? Did the rep do everything he or she was required to do? Because what you have in some respects, when you get that complaint where you really can’t establish exactly what happened between the rep and the customer, now you’ve got other decisions to make. Maybe this isn’t going to be a regulatory matter, but how do we handle this with the customer? How do we handle this with the registered rep? This all might fall short of a regulatory or compliance blow up, but there are going to be steps that you probably need to take unless you find that the complaint is truly without merit, and that is possible. And in that case, then everyone goes home happy, except the customer.

Ed Wegener:  Well, let’s say you do determine that there’s some merit to the complaint and there’s some issues that you identify that require fixing, whether it’s policies, procedures, controls, et cetera, that could have addressed the issue in advance. When do you start beginning to start working on fixing those issues? And are there benefits to starting early, Evan?

Evan Rosser:  There are, but there are dangers to it as well. `I mean, you don’t want to fix something that may not be broken. You’ve got to make sure that, was this a failure of the procedure and that we need to rewrite the procedure? Was it a failure of supervision and that they did not follow the procedure or did not detect the activity that’s in question here? You don’t want to just run off and change too much on the basis of one or two or even three complaints. You really have to get to the bottom of it. But there are complaints and patterns of complaints that will identify a gap, or a flaw, or a deficiency in the procedure or, in the execution of the supervision of the rep in question.

John Ivan:  Yeah, I would agree with that. There’s been a number of times, and we’re going to talk about interacting with counsel and being and providing advice and counsel in addition to testimony.  But there’s been a number of times where it’s like, we know we need to fix this, but you’re actually dealing with counsel either from a regulatory perspective or a litigation perspective. And if you go too early, you can be signaling in a way that can be detrimental to your client, either in litigation or regulatory. You need to enhance things, but if you go too early and too big, it sends a signal both through the regulator or the panel that you really did have some insufficient procedures, maybe even failure to supervise.

Ed Wegener:  When it is clear that something needs to be addressed, especially when regulators are involved, it sometimes does demonstrate some good faith. If you can show to the regulator that, Hey, we’ve identified this. There are some things that can be fixed. We’re in the process of fixing more. We fix them. We’ve hired consultants like yourselves to come in and address the issue and point out things that we can do more effectively. It can go a long way. But I think that timing, to your point, is really important. So, I think that’s really helpful in sort of framing out what an effective process is. And again, like you guys had mentioned many times, it’s going to really depend on the facts, the circumstances, the firms you’re dealing with, what the issues are that are involved. But a firm needs to have a well thought out process in advance of how they’re going to deal with these issues. So maybe we take a step back. If you guys could just maybe summarize, what you think are the two or three keys to an effective investigation. What are the things that firms should really take away as these are the most important things?  Why don’t we start with you, John?

John Ivan:  This will be a repeat, but one is make sure you have it down as a process.  This is as important a process as any other important compliance or other control process. So it’s important that you have it down, you have it staffed as well as you can, so it’s repeatable and documented. And then, we’ve talked, and we’ve even added additional stakeholders as we’ve been along. Make sure you have the list of important stakeholders and that they are contacted and integrated at the right time in that investigation. Those would be my two thoughts.

Ed Wegener:  Evan, what do you say are primary keys?

Evan Rosser:  I would go back to something I mentioned earlier, having a process to identify when there is a pattern of complaints, be it product, rep, operational, whatever it is to be able to just start that review, to start that investigation, to identify what needs to be reviewed, I think is critically important. Second of all, I would, if the problem is significant, or even if it’s not, to get to the bottom of it as quickly as possible through documentation, finding out what it is, get your arms around what the problem might be. The third, I would say, if you find something that needs to be reported pursuant to 4530-U, report it. However, <laugh>, I am not a big fan of reporting to the regulators until you know what you have, and you’ve taken every step necessary to fix it, because you don’t want to throw out a deficiency to a regulator and it’s not fixed yet, or you don’t know the extent of it, because that’s red meat to them, and they’ll just come in and start looking everywhere. So if you need to report it, if the rules require yes, report, obviously report it. However, I wouldn’t self-report to regulators until I knew exactly the size, the magnitude of the problem and you’ve got it fixed.

John Ivan:  I agree with that. This isn’t a 4530 podcast, but the language is built in there to support exactly what Evan said.

Ed Wegener:   We’ve talked so far about the investigation stage and identifying there’s an issue that we need to look in, and how you gather information to determine whether there may be an issue. Now, let’s say the issue moves into the more formal process of a litigation or a formalized regulatory investigation. I wonder if you can each talk about the kind of support that you’ve provided to clients and counsel in litigation support and the types of roles that you’ve played and, how you’ve interacted with firms and counsel during those processes. Evan, why don’t we start with you?

Evan Rosser:   Sure. Most recently I’ve worked with counsel on a trading case where he had received a Wells notice from the SEC, and he wanted assistance in preparing a Wells submission. Oftentimes, and this was one of those cases where the analysis is somewhat complicated, it’s very in depth; it’s voluminous, and he needed help not just to go through the pattern being alleged by the SEC, but also just getting his arms around all the data. What was there and how could he review it, in a way that was significant, that the SEC may not have reviewed it. Similarly, there was another case where I worked with counsel, and again, it was a trading case, and there were some very specific trading issues that in this case, FINRA was alleging. And he had, I thought, a very significant defense.

We worked with the firm in analyzing what FINRA had provided to back up their allegations. And I think significantly, part of this is knowing your audience. And at this, when I got involved, they had already established the hearing panel for the hearing, and there were no traders on that panel. And I told them, look, I think you need another expert. I’ve done all I can do, but you need a trader who can explain to that panel who are not traders exactly what happened. I’ve testified in a FINRA, again, helping the defense, particularly in this other case where I testified, knowing how FINRA puts their cases together, knowing how they gather information, finding out why did they start this invitation?  What was their tip off as to start this? Was it from a routine exam? Was it from some internal report? And then what did they do with it? That’s all very important in responding. So in each one of these cases, we were kind of pre-Wells and assisted with the Wells. We were post Wells, helping them with some motions as far as trading analysis, and then, testimony and assistance at the hearing.

Ed Wegener:   I think having that perspective, Evan, both as a regulator and as a compliance practitioner, helps because you can view it from both lenses. And that’s really helpful in that regard. John, you’re one of our newer consultants, but you’ve been doing this for a long time. Why don’t you talk a little bit about the roles that you played in helping firms and counsel with litigation once it’s reached that reached that stage?

John Ivan:   Sure. And, while I have done some work in the regulatory space, very similar to what Evan spoke about, I’ll focus more on the civil side. So, the client’s going to be either in arbitration or federal or state court. I’ve assisted counsel with what I call a litigation support consulting role and a testifying expert role. And then, I’ve also provided written opinions, if necessary, in federal and state court. Those fall into two categories, either affirmative for the client, and then I’m often brought in to say, we have this unbelievably crazy opinion on the other side, expert opinion on the other side, and we’d like a rebuttal report. So those are the various types of categories. I think what Evan said is unbelievably important in that a lot of times there’ll be one, two or three experts. And so to be able to work not only to bring in the skills that you bring in, but to be able to work with other experts and understand their role and coordinate with them is very, very important.

Evan Rosser:   As a point of interest, I remember when I was working with NASD, the precursor to FINRA, NASD generally did not allow experts in their enforcement hearings. They said they weren’t necessary. They took the position that a hearing panel of people in the industry were experts themselves, and they did not need experts. That’s clearly not the case any longer. Because as cases have gotten larger and more technical, you can’t rely on having that kind of expertise on the panel. One of the arbitrations that I did was between a bank broker dealer and one of their registered employees, because those disputes also must go to arbitration. And in that particular matter, the rep was claiming that there was some compliance breakdown, which is why I violated the rules, because I wasn’t properly trained. The compliance and the supervision were not adequate. So I was retained to review the procedures and the supervision to see if there was any merit to that case. But the point being, that we talk a lot about customer complaints, but also complaints by employees are required to go to arbitration as well.

John Ivan:   In fact, in good markets, that’s where a lot of the litigation actually is in the industry. Rep versus firm, or firm versus rep matters, the recruiting the rating type of matters. And they often involve who, who owns the data, who has the records. We just spoke at the NSCB conference, that’s another area that you need to equally think about and think about what help you might need in those cases.

Ed Wegener:   Well, you both have talked about acting as an expert witness, and I know that both of you have on a number of occasions, served as expert witnesses on regulatory matters or civil matters and arbitrations. If a matter does require you to act as an expert and you’ve been engaged, what’s your approach? What do you consider to be the most effective practice when working as an expert? John, why don’t we start with you?

John Ivan:   Sure. I think, and Evan brought this up very early on, I always include being engaged actually as a consulting expert that may lead to a testifying expert after review of the information and materials. And it goes to what I think is one of the most effective practices, and that is being known to the client and outside counsel as the subject matter expert over this being the go-to person. And especially having no qualms about bringing out the weaknesses in the case so that decisions can be made at the right time. Most of the decisions you can still deal with in providing expert testimony, but that can lead to a better result. And just really establishing that role as an expert witness. Each case is different, and if there’s outside counsel involved, you have to measure that up against their approach. But those are what those I think are some of the most important things to do as an expert.

Evan Rosser:   As an expert, I’m working for the council, I’m taking my lead from council, whatever he or she wants me <laugh> to say or how to approach what I do. As an expert, you’re always, in my experience, a consulting expert. You may not always testify. Matter of fact, several arbitrations often settle before I’ve ever been called to testify. But that consulting role, even when you testify, I always participate and say, well, would you like to bring this out? Do you think we should stress this point? I can certainly say this on that particular issue on this point. So, you know, you’re always helping because even the best securities council there, there are certain broker dealer operational items, there are certain regulatory procedures that they may not be familiar with. And it’s helpful to bring that out and let them know that we can pitch it this way. And I can certainly testify to that. Ultimately, my testimony’s always my own. I mean, that’s never in question. Any report I write, my testimony is always my own. But you can certainly kind of work with counsel to testify in such a fashion as to make the points that need to be made.

John Ivan:   You’re being retained by counsel, the client, usually counsel, and you’re being retained to provide a number of opinions, specific opinions, and counsel’s often very good about being able to deal with the issues that you’ve brought up as a con, as a consulting, uh, on your consulting side.

Ed Wegener:   Great points. And I wonder if we talk about expert witness. We talked about each case is different and your approach might be different depending on the type of case that you’re working on. I wonder if you could speak generally, of course, but talk about some of the types of cases that you’ve worked on as an expert and what you thought was most effective, depending on the types of cases that you were working on. Evan, why don’t we start with you? I know you mentioned a couple trading cases.

Evan Rosser:   Yeah. Trading cases can get complicated, especially if they’re dealing with a longer review period. And it’s always important to make sure that everyone’s focused on the review period in the complaint. But it can get very complicated. And there are trading issues that really need to be addressed and explained. They’re second nature to traders, but to explain them to somebody else, it’s difficult. And as I told counsel that remember that hearing officer, an offender hearing is working for this same company that’s prosecuting the case. So <laugh>, you really need to make your case to that hearing officer and to the panel. Honestly, I think with all due respect to FINRA, sometimes their trading cases are not put together as tightly as you might hope they would be put together, that they’re not touching on all aspects of the trading activity.

They find something, they find an email. I’ve worked on a case where there were two emails that suggested front running by the rep on behalf of a client.  Sometimes FINRA finds something like that, and they just go and get the trading to support that position. Whereas we can work and say, well, no, you didn’t look at this trading. You don’t have the context for this trading activity. So we’ve certainly done that case in federal court.  That was a criminal case. And unfortunately, the counsel for the defendant did not know securities law, and he opened the door to all kinds of problem questions that I could respond to at great length with facts that were very damaging to his client.  But yeah, we’ve worked on trading cases, sales practice cases, suitability cases, arbitration, again, a complaint between a rep and the broker dealer.  So, there’s a wide range of complaints and issues that I’ve dealt with. And I always try to bring the perspective of how this regulator put this case together, because if you can get behind how they put that case together, you can find some cracks in it that you might be able to exploit.

Ed Wegener:   Excellent. And John, how about yourself? What types of cases have you worked on?

John Ivan:   So the most common type of case I’m brought in on is industry practices and supervision because we’re generally dealing with something has happened, that’s why you’re getting sued there, that’s selling away fraud and other type of things that actually have happened at the firm with arbitration panels now. And the prevalence of all public panels, at least in FINRA in investment advisor space.  Same sort of issue, as Evan said, what is your audience? And there’s a number of vendors out there. You can get a lot of information. And council has it, council has information on the panel. And often what I find most effective is working with council to set up, in essence, what’s a dialogue with a panel. Just talking with a panel about what the industry practices and standards are for supervision, what the regulator’s expectations are with what the regulators, even though they’re have very strenuous investigations are looking at fraud and supervision and how did it happen.

There still is a reasonableness standard in the supervision. And often the claims in the civil arbitrations or litigation are based on that.  As Evan said, you’re taking guidance from counsel, and you are trying to deal with the negligence that’s behind the supervision. So being able to talk with a panel and educate them and tell them what two advisor’s responsibilities are in a matter, and especially being able to tell them about the reasonableness standard and to tell them that you don’t judge it based on what we now know here on Monday morning in the hearing. But we test and establish the reasonableness as it was happening as a supervisor was dealing with the multitude of things that they deal with every day, and was in fact the conduct reasonable under those circumstances.

Ed Wegener:   And that’s an extremely important point to get across to a panel, is that it’s not just reasonableness, but it’s reasonableness at the time the action was taken. And when you’re at these hearings, you have the benefit of all of this after the fact information that you can judge the actions on, but you really have to put yourself in the position of the person who was making the decision at the time that it happened and wasn’t reasonable back then.  Which can be really challenging for hearing panels to do, because now they know this information and they have to forget that they have this information if they’re going to do that appropriately. And that’s one of the big benefits that an expert can really relay to the panel, is that’s the position that they need to put themselves in. That’s the expectation of regulators in terms of what those expectations are. So I think that’s a great point to make.  Now we’ve talked about the investigation process, litigation process, acting as an expert. We talked about when matters settle, and one of the things that regulators have increasingly been requiring firms to do is to engage an independent consultant as part of required undertakings when they go into settlements. Having done a number of these, what do you think is the most important thing when executing such an undertaking? Why don’t we start with you, Evan?

Evan Rosser:  I have done a number of independent consultant assignments both for FINRA, the SEC and, for one state. And I think the most important thing that I’ve learned is know what the regulator is expecting.  Because you’re called an independent consultant and you’re independent of the firm, but you’re not really independent of the regulator because everyone, or most everyone that I’ve ever done, the independent consultant report, there’s always follow up from the regulator, what about this? Did you look at that? We’d like you to look at this. So you want to make sure that some of these take a good bit of time. And when you’re done and you write your report, you want to make sure that you’re hitting the targets or you’re hitting the topics that the regulator really wants you to hit.

Because as I said, they almost always have follow up about well, what about this? Did you look at this? And it’s important that you explain to them, here’s what we did.  One of the things that has been a problem in a couple of these is you have a complaint where the review period of the complaint might have been 5, 6, 7 years ago. Well, you’re going in now 5, 6, 7 years later, and it may be an entirely different firm and the regulators, they’ll see the firm from years ago. So that’s just one of the things that you need to work with the regulator to manage their expectations and just find out what their expectations are.

John Ivan:   I would agree with that. And the orders requiring the independent consultant, you see them as you would expect in all flavors. Some of them are very detailed and others are not. And I think it’s the latter ones, the ones that make it trickier to get at those points that Evan just made, because this really is a document for the regulator.  It’s the firm needs to have it done.  And you want it to be done as efficiently and as effectively as you can for the client that has engaged you. But you have to have an understanding with them. As Evan said, the regulators are really going to ask questions on it if they’ve required it. So a couple of things to expect, some things that you’re going to say, that they’re going to really have to consider, that they haven’t thought of already.  Because they won’t have thought of everything and how to best phrase that to be able to demonstrate that it truly was an independent review.  And that the firm took seriously what you said and either came to an agreement with it or there  was an understanding between all three parties that was possibly an alternative. At the same time, you want to make it as effective and as efficient for your engaging party decline,

Right? Because you’re really dealing with two major stakeholders here. It’s the client that’s paying you, it’s the clients whose procedures processes that you’re reviewing, but it’s the regulator that’s setting out what really the scope of that engagement’s going to be. And you want to make sure that you understand what that scope is, what you understand, what it is they’re expecting to come out of this, and that you’re able to manage those expectations, like Evan said. And then another important piece to your point Evan, about understanding those expectations being so important, is the timeframes associated with them, because they have very specific timeframes, very tight timeframes. And typically what they say is that after the first initial review, there’s often a review that’s done one year after. So you have to make sure that is on the roadmap as well.

Ed Wegener:   So that concludes the discussion that we wanted to have with respect to this entire process. Really appreciate you both sharing your experiences, your expertise in this area, definitely a benefit to Oyster’s clients and hopefully to all the listeners. We really appreciate it and thank you. And join us again when we have future podcasts.  Hopefully you find these very helpful and effective. Take care.

Bob Mooney:  Thanks everyone for listening. If you’d like to learn more about our experts and how Oyster can help your firm, visit our website at oysterllc.com. If you like what you heard today, follow us on whatever platform you listen to and give us a review.   Reviews make it easier for people to find us. Have a great day.

About The Podcast Speakers
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Ed Wegener

Ed Wegener is an innovative compliance, risk management and supervisory controls expert with deep understanding of Federal Securities Laws and the rules of self-regulatory organizations, as well as technology optimization and risk mitigation. Prior to joining Oyster, Ed held several posts in FINRA, most recently as  Senior VP and Midwest Regional Director.

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Evan Rosser

Evan Rosser is an experienced and respected securities industry professional with over 25 years of experience managing complex securities investigations for NASD/FINRA and providing compliance expertise to both broker-dealers and investment advisors.  Evan has served as CCO for both investment advisors and broker-dealers, as well as providing compliance support to numerous broker-dealers and registered investment advisors.

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John Ivan

John Ivan collaborates with clients on all aspects of broker-dealer and investment advisor compliance and serves as an Expert Witness.  John leverages his experience leading both compliance and legal departments for major financial institutions, with a focus on wealth management, brokerage and advisory issues.

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