Is a “no-findings” Letter Still Possible to Receive?
Presented by: Beverly Fetcko, Director of Compliance
It feels as though every day brings a new regulation requiring broker-dealers to leap into action and put additional supervisory procedures into place. With the increased focus on how and what a broker-dealer is doing day-to-day, is it merely a dream gone by to come through any regulatory examination with no findings? I don’t think so. A broker-dealer can put into play various policies and procedures that will help the BD reduce or potentially eliminate regulatory deficiencies. Let’s discuss some practical tools a broker-dealer can deploy to help achieve the goal of “no findings” from a regulator.
FINRA and the SEC have not kept it a secret that all broker-dealers should adopt procedures that are “reasonably designed to achieve compliance with applicable securities laws and regulations…”. These should be tailored specifically to the type of business the broker-dealer conducts, giving consideration to the size of the broker-dealer and the complexity of the products and business activities it engages. NASD Notice to Members 99-45 offers some specific guidance as to how a broker-dealer’s supervisory system can be best tailored to its business.
Gaining Organizational Buy-In:
While the broker-dealer’s written supervisory procedures forms the foundation for a firm in laying out overall expectations and the broker-dealer’s approach to meeting regulatory requirements, just having them is not enough. The broker-dealer must have strong support and a solid supervisory structure to effectively implement the procedures. All areas of the broker-dealer need to “buy-in” to a culture of compliance to try to meet the no findings objective. One of the best ways to gain this is to have clear, concise, and relevant procedures and make certain all personnel understand the expectations.
Written procedures should provide the framework to ensure employees understand the expectation of the broker-dealer and to help the broker-dealer identify areas of risk and regulatory exposure. The procedures should be clear and relevant to the broker-dealer’s business lines and processes. In addition, the procedures should be kept current to address and identify all new regulations, actions or broker-dealer initiatives and business. When new procedures are added, the broker-dealer should assess the impact the implementation will have on various roles, including IT capabilities. A key component to having comprehensive procedures is to ensure they address the frequency of the supervision that must take place and the records that must be maintained to evidence supervision. (Remember, if you don’t document it, it is assumed it didn’t take place.)
While the written supervisory procedures describe the tasks and who is responsible in order for the broker-dealer to remain compliant, how does a broker-dealer keep up with these required tasks? A compliance calendar can help make this much easier. While it is easy to say create a calendar; however, the most effective compliance calendars must translate the responsibilities outlined in the WSP into a routine for the persons responsible in fulfilling the action.
With robust procedures initiated that describe the duties that need to be completed, and a compliance calendar where all the designated principals have items to complete and know the expected time frame, the broker-dealer should be well on their way to the coveted “no findings” letter – right? Unfortunately, not quite. Like anything else, there must be execution.
Execute and Monitor:
Each designated principal must not only be aware of what they are required to complete, but be trained and knowledgeable in the task. It is important for principals and compliance staff to keep current on new rules, rule changes, and expectations – not only from the broker-dealer, but from regulators. Attending educational conferences and then sharing information learned from them with the staff is one way of accomplishing this. As with so many areas of compliance, training is meant to be ongoing. In addition, the WSPs will list relevant reports, such as exception reports, and other tools available for use by designated principals.
For your areas of compliance to remain effective, they must be monitored closely and often to make certain it is working as it was designed. This is the intent behind the annual supervisory and control testing required under NASD Rule 3012 as well as branch office inspections required by NASD Rule 3010. These two activities help Compliance areas to review and monitor the completion of assigned duties of designated principals to make certain the responsibilities have been fully completed and on a timely basis. When a broker-dealer conducts the annual testing required under Rule 3012, it ensures that their supervisory procedures are kept current with any changes in business or product lines as well as regulatory changes. Also of benefit is identifying and addressing outside regulatory risks. These risks (i.e. financial and operational among others), if not addressed in a timely fashion, can result in significant negative consequences, including regulatory violations. When gaps are uncovered in a firm’s testing results, the involvement of the Compliance Department will help to ensure that any related risks are addressed and will go a long way in helping to achieve a “no findings” letter. Any gaps or weaknesses that are identified must be addressed immediately by senior management. Failure to do so could cause the broker-dealer’s compliance and supervisory systems to be jeopardized.
Do What You Say:
The best thing a broker-dealer can do to help in achieving the most successful regulatory examination is to say what it is going to do, and then do it. Keeping your WSPs clear, concise, and to the point of your business; establishing clear action items and identifying who is responsible for the item; making certain each designated principal is qualified for their area of responsibility and remains up-to-date with training; and conducting risk-based compliance testing to help ascertain areas of improvement all will move your organization closer towards achieving that sought-after “no findings” letter.
Please call Regulatory Compliance with further questions (603) 434-3594.
 See FINRA Rule 3010.