The Upside of Independent Third-Party Reviews

Regulatory settlement terms could require that the firm obtain the services of an independent third party to review and make recommendations for the firm to adopt and implement. While sometimes viewed with some animosity as an extension of the regulator, third party reviews can in fact work to your advantage during the settlement and pre-settlement process. Listen to this episode as Oyster Consulting’s Patrick M. Dennis and Evan Rosser discuss the upside of third party review requirements.

Transcript

Speaker 1: 0:09

Welcome to the oyster stew podcast, where we discuss what’s happening in the industry. Based on what we see as we work with regulators and clients, oyster consultants, our industry practitioners, we aren’t career consultants. We’ve done your job and we know the issues you face. You can learn more about oyster consulting and the value we can add to your firm by going to our website, oyster llc.com.

Speaker 2: 0:46

Hi, I’m Patrick Dennis . I’m one of the founders and general counsel of oyster consulting. And with me today is Edmund Rosser , associate director of oyster consulting. And we are here to talk today about independent consultants and when the regulators require, or would like you to hire an independent consultant with regard to a regulatory issue that you need to resolve. So we’ve done a number of these both for somewhat simple issues, but most of the time it has to do with a relatively complex issue. We’ve done it for market access and high-frequency trading. We’ve done it for AML issues and a number of other things, variable annuities, things like that. And the simple way we go about it is when we get retained as an independent consultant. One of the first things we want to do is meet with the regulators, sit down with them, obviously pre COVID. Now, I guess, virtually to talk with them about the order of the settlement, why an independent consultant was required. Obviously what’s required by the independent consultant is spelled out in the order, but it frankly gives the regulators an opportunity to vent and talk about things that they think are wrong with the firm that perhaps didn’t get included in the order. We find that that makes them feel better. And it gives us a little bit better rapport with the staff that we’re going to be working with. Um, as an independent consultant, you know, the firm is required to hire an independent consult and then pay them. Counsel is almost always involved because it’s part of the settlement process. And it’s a little bit challenging because while we’re getting paid by the firm and working with council we’re in some ways responsible and have to make sure that the regulator is happy with us and we are working for them and just trying to achieve their goals as well. So it’s a little bit difficult. We have had instances in the past where the regulator has tended to try and expand the scope of the independent consultant order. And we’ve had to get counsel back involved to talk to the regulator because we’re in kind an odd position where we’re getting paid by the client, but also working for the regulator. So we sometimes will have to get counsel back involved to talk to the regulators about the scope, what was actually negotiated in the consultant, independent consultant order and things like that. One of the things that we find when we do these is we very much look at it like any other consulting project, which is a scope schedule and budget. We don’t look at it as a blank check and we’ve heard from other folks or from folks who’ve had to hire independent consultants in the past that they are very, very , uh, unhappy about the fact that the consultant tends to look at it as a blank check and the regulator makes you pay whatever you got to pay to get it done. And so they think it’s a great way to maximize revenue. Uh , we don’t do that. We , we look pretty ARD and put together a budget and assuming we stay within the scope, we stick with the budget, but we’ve done a number of these and it’s a good way to resolve things. Most of the time, there’s a delay between when the actual conduct or place and when we get hired. And a lot of times the problems or issues that resulted in the independent, as long as I got the firms gone a long ways to already resolving those. And so it’s more of a verification that it’s been solved, that the policies and procedures have been updated, that the conduct has been satisfied and redundancies put in place, whatever needs to be done, but we’ve also done a number of them. Pre-settlement. And that actually makes more sense than I think Evan can add to that because he’s been involved in a number of the pre-settlement consultancies that we’ve dealt with.

Speaker 3: 4:40

Yeah, we have. And I I’ve worked on both. We, as you mentioned, Patrick, we have done a number of post resolution, independent consultants when the firm was required by an undertaking in the settlement, we’re in the, in the decision to hire an independent consultant and we’ve done those market access , uh, low price, securities trading, AML complex, or Y supervision compliance problems. We’ve done a number of those and , and they can be challenging because you do serve as sort of a liaison between the respondent firm and the regulator. And it can be a challenge. But what we try to do is work with the client, the firm, and help them make the best case they can to the regulator that they’ve remediated the problem and the problems that gave rise to the complaint aren’t going to happen again. And that’s really what we see our role is, is helping the firm put together the best remediation and sell that along with the firm to the regulators. As Patrick mentioned, though, we’ve done this prior to the complaint being issued. And this is more of a mitigation effort in many where the firm and or its counsel knows that there is a potential problem and they will not want to get in front of it. And they will hire a consultant to work with them in a role , very similar to the independent consultant, but different in some respects there , if you do it before the , the complaint, you have a lot more control over the process, you get to con you have more control over the scope. Uh , the schedule, the timing, you’re not confined to the four corners of the complaint because it hasn’t been issued yet. And in some cases you might be able to forego the complaint altogether. There’s no promise of that, of course. But if you say, look, we brought somebody in a consultant, a firm that has experience and expertise in this area, and we’re working with them now to fix any potential problems. Now, as I said, you can’t really promise you won’t get a complaint. Anyway, however, you can often you , by doing that evidence saying that you’re fixing the problem, you have the good faith and fixing the problem. You’ve got competent people to help you fix the problem. Even if you don’t forestall the complaint entirely, you can often get a different type of complaint. You might be able to settle or negotiate a different resolution to the matter.

Speaker 2: 7:25

Yeah. One of the things is we’ve been hearing for years about cooperation and credit for cooperation. And certainly I think hiring a consultant beforehand to fix the problem long before you get to the point of the administrative proceeding or the complaint being filed, or you’re negotiating the AWC, if you will, or the settlement documents at the time, you can, I think use that argument, that it’s part of your cooperation is that you brought in an outside expert to come in and help solve the problem. And you were proactive in that rather than waiting until you were ordered to do so by a consultant, as part of the undertaking in a settlement document, as Evan said, when once the complaint’s been filed or the administrative proceeding has been filed, your flexibility, your ability to manage the process and thing is much more restricted because they now have a public document that’s out there that they put out often put out with a press release that talks about all the things that the regulator thinks your firm did and all the bad things that they want to let the public know about. And everybody knows that they’ll say, well, if you settle for this and do this, we’ll we’ll, we can consider this and this and this, but once we file the complaint, or if we go to a hearing we’re going for the maximum, we’re going to go for everything we can get and more because you’re taking up our time and effort and all of that. So if you can resolve them in advance and often you can get an independent consultant in to review things and work with your firm to solve the problem and solve the issues that the regulators are concerned about. It goes a long ways . Having the matter resolved on much more, I think, much more favorable terms than , um, if you wait until after the complaint or administrative proceeding has been filed, that all being said, you know, we would love to help you out. If you get into a situation where you need help, if we can help you and we can do it right. And we’re the right independent consultant based on our , uh , experience and our team and our expertise. Great. If not, we certainly will try and help you find somebody else. We’re , we’re not opposed to not doing things that we don’t want to do. Things that aren’t in our sweet spot. And if we can’t do them right, we’ll try and help you find somebody else. Obviously we’d love to be your first call when you get into a situation like this, and we can work with you and your counsel to , uh, help resolve the matter. Thanks for your time. And , uh, feel free to reach out to us at www dot oyster, llc.com. That’s O I S T E R llc.com or by phone at (804) 965-5400. Um, we’d love to be your first call and if we can help you out, we’d love to do that. So thanks and have a great day. Thank you.

About The Authors

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.

Patrick M. Dennis has been involved in the securities industry for over 30 years, most recently as one of the Founding Principals of Oyster Consulting, LLC, a compliance, regulatory, operations, clearing advisory, software and technology consulting firm for broker-dealers, investment advisers, mutual funds and hedge funds.

eBook

Whether you are looking to change from self-clearing to fully-disclosed (or vice-versa), exploring your clearing options or starting a broker-dealer, Oyster can assist with the assessment, analysis, vendor selection and conversion processes.

Download