Keeping regulators happy

Most people in this business fear regulators, and for good reason. But the first step in dealing with them effectively is to understand they are themselves motivated by fear, said Stephanie McManus, president of Compliance Support Services at the Advisor Group’s annual Distributors’ Summit.

Regulators are protectors of the public, and are motivated to fulfill that mandate in a visible way. As a result, two main fears lurk behind everything they do: first, the public will be harmed by your actions or inaction; and second, they will be held accountable for not having prevented harm.

“If you go into every exchange with a regulator understanding these two fundamental fears, you’ll be ahead of the game,” McManus said.

It’s common for people to take regulators’ inquiries personally. “You need to understand their public protection perspective has nothing to do with you or your firm, and everything to do with their job,” she said.

And don’t expect regulators to sympathize with your staff shortages, care about how happy your advisors are or how much money your firm made, worry about cost of responding to the regulatory inquiry, or concern themselves with technical glitches you may run into as you prepare your response.

“You can plead until you’re blue in the face — it will not help you. If anything, focusing on these irrelevant matters will be a red flag that you haven’t got the infrastructure, resources or compliance culture needed to keep the public safe.”

If you’re struggling with any of these things when the regulators come knocking, keep that close to your chest. “Never let them see you sweat. You don’t want them to know you don’t have everything under control,” McManus suggested.

She advised avoiding what she calls an unmanageable confrontation with regulators.

“This is when they pull out the full weight of their authority to force you to address the issue the way they want you to. You cannot win if it gets to that point. So don’t let it happen.”

Address first and foremost the investor protection issue in a clear and decisive way, and ensure it won’t come back to bite them. Again, their fear of being seen as failing the public is regulators’ number one concern, so you need to convince them their bases are covered when they sign off on your file.

Do whatever you can to make their lives as easy as possible. “Try to solve their problem,” McManus said. “Understand they are understaffed and do not have a lot of resources, so they don’t want to spend a ton of time fixing your problem. It’s your business – you fix it.”

Establishing trust and a good rapport with regulators is perhaps the most critical step in the process. It won’t be achieved with a single phone call, but rather through “a culture of compliance that you demonstrate openly over time.

“You have to be very detailed. Make reference to the relevant rules, demonstrate you’ve done the necessary research, and show you’ve read other cases or material that’s relevant to your own case.”

Another key element here is patience. The regulator does not understand your business like you do, McManus said.

Sometimes junior staff will be assigned to work your case, and they have very little understanding not only of your business but also of the financial services business.

This means you’ll be spending more time educating than fixing your problem. “Too bad,” McManus said. “It’s part of the investment in building that trust relationship.”

Once you come up with the solution you think will solve their problem and work within your business, present your case in a face-to-face meeting, preferably with the senior party on the team working your case, McManus suggested.

Finally, think of regulators as some of your main business contacts. They have the power to shut you down now or snuff out your future, so keep them happy. For example, if you revamp your compliance manual, send them a copy.

“Keep in touch, let them know what you’re up to. It’s money in the bank.”