Every year, surveillance tools become increasingly sophisticated. As such, now more than ever, financial advisors are regularly flagged for potential violations of firm policy and/or regulatory rules. Transgressions may range from minor technicalities to violations that can lead to potential termination for cause, resulting in Form U5 disclosures. These disclosures may, in turn, lead to regulatory inquires and enforcement action.

Wherever the issue falls on the scale, there is one absolute axiom for achieving the best possible outcome: misrepresent nothing. Depending on the circumstances, when the inquiry from your compliance department hits your email, you must quickly determine the best approach for responding:

  • Fall on the sword and confess everything
  • “Lawyer up” and say nothing on your own
  • Something in between these two options

Decades of experience as SEC Enforcement attorneys and serving as both in-house and outside counsel leaves us with no doubt that this is axiomatic regardless of the severity of the underlying conduct. There is no question that advisors are penalized far more often and far more harshly when they attempt to mislead or even worse, flat out lie. This lack of candor breeds distrust, which, in and of itself, is fatal to an employment relationship. Not only is it the wrong thing to do, but attempted cover-ups are generally futile in the broker-dealer world of today considering the experience and sophistication of your firm’s in-house legal, compliance and risk personnel.

In sum, Rule Number One is “do not mislead or lie.” Rule Number Two is to confer with counsel if you are concerned about an inquiry from your employer confer. The benefits of doing so far outweigh any concern as to how it might look to your employer if you elect to involve counsel.

Finally, Rule Number Three is also critical: Never respond to a regulator without involving counsel. When it comes to a regulator, the stakes are even higher. Termination by your employer due to a false or misleading statement is bad enough, but lack of candor with a regulator may result in a much worse predicament up to and including a bar from the industry. It is, therefore, that much more critical that before speaking to the SEC, FINRA or a state regulator, competent and experienced counsel should be retained.

Lewitas Hyman PC specializes in representing financial advisors in matters relating to their employment, as well as in regulatory issues involving the SEC, FINRA, state regulators, other self-regulatory organizations, and the CFP Board.

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