8 Steps To Minimize Risk Of An Enforcement Action

Firms are frequently, and unnecessarily, surprised when the findings of regulatory examinations turn into enforcement actions.  There are practical, effective, and reasonable steps a firm can take to avoid this scenario, including establishing a process that is constantly preparing the firm for a successful examination.

Remediate any previous exam findings. The most effective way to minimize the likelihood of an examination going to enforcement begins long before the exam. One of the first things regulators look for is whether any prior exam findings have been remediated. A common reason for an Enforcement referral is repeat findings. At the conclusion of an exam, make it a practice to fully and timely remediate any findings.  It is typically too late to address any deficiencies from previous examinations by the time you get notice of a new review.

Develop a process to monitor current regulatory priorities, sweeps, areas of focus, and enforcement actions and stress test your firm’s compliance program against them. Don’t rely on a general perception that your firm doesn’t have the same problems that have caused issues for your peers. Mock audits or, in the case of limited resources, third party reviews can be helpful to level set your understanding of your firm’s state of compliance.

Prepare for the exam. Preparing for the exam is another opportunity to ensure you are in the best position to influence a positive outcome. Well before regulators come on-site, develop a process for how the exam will be managed. Consider having a single, accountable person to manage the exam and be point person with the regulators. Prior to the onset of the examination there should be a defined process to locate, organize, review, and produce requested documentation and keep track of what has been produced.

Consider the logistics. Where will the examiner be located? Have team members been alerted that regulators will be on site? Will the necessary personnel be available (e.g., will critical team members be out on vacation)?

Provide active oversight once the exam begins. Carefully review documentation requests and produce only what is called for, paying particular attention to the time period. Ensure the request calls for information subject to the jurisdiction of the examiner.

Ask clarifying questions. If you are not clear on what a particular request calls for.  Take the time to review the documents produced. You need to know what is in the documents the examiner is receiving and keep a duplicate file of all information produced. If you see an issue, develop a strategy, typically working with counsel, to address remediation and informing the examiner.

Avoid frustrating the examiner.  Be timely when responding to document requests. 

Avoid immediately disputing or pushing back on findings. How a firm responds to findings is often critical to whether the examination is referred to enforcement. Firms need to avoid a reflexive instinct to dispute or push back on findings.  A clinical assessment of the findings is important, and an area where third parties such as consultants or law firms can provide assistance. If your assessment confirms the examination findings, quickly develop a remediation plan and share it with the regulator.  On the other hand, if your firm believes the finding is erroneous, develop a strategy to address its views in a non-adversarial manner. Having a third party to press the point may help here as well, as it allows firm personnel to maintain a working relationship with the regulators. 

To avoid an examination turning into an enforcement action, don’t wait for the notice of examination to begin preparation. Once the exam begins, be organized, diligent and cooperative to make the examiners job as efficient and productive as possible. Review documents before producing them to determine if there are problems or concerns, if possible fix any issues identified before the exam ends, and be responsive.

Understanding how regulators use information, what they expect and the best way to interact with them is a vital skill when it comes to getting the best outcome from examinations. Oyster’s experts have years of experience with FINRA and SEC regulators from all over the country. Our employees are former regulators themselves, compliance officers and C-Suite executives that have addressed an array of regulatory challenges. When regulators come to your office to conduct an examination, our team can support your compliance department. If you have had an exam that produced findings our team will work with you to assess and, if necessary, remediate the findings and provide industry best practices.

About The Author
Photo of Bob Mooney

Bob Mooney

Bob Mooney serves as General Counsel for Oyster Consulting, bringing deep compliance and risk leadership experience. Bob’s executive roles managing risk and controls for Wells Fargo Advisors’ Wealth and Investment Management businesses, in addition to his roles of Chief Compliance Officer and Chief Administration Officer, provide him with a perspective that expands Oyster’s ability to view issues through many vantage points.