Advisors love to learn from other advisors, which is why about 75 of them showed up early for a compliance session during Commonwealth Financial Network’s national conference.
John Hagberg, assistant director for licensing and compliance for Commonwealth, moderated a panel of three advisors who had gone through an audit recently. Heath Bartlett of Bartlett Financial was audited by the South Carolina Attorney General in May, while Sharon Duncan and Marcus Pinnock, both OSJs at their firms Selah Financial and Sterling Financial, respectively, were audited by FINRA over the past two years.
Hagberg said state auditors will, as a rule, show up announced, while FINRA will normally ask a broker-dealer for scads of data, which they’ll “run through” the regulator’s risk matrix to decide which branches to audit. Hagberg gave his first piece of advice for when an auditor shows up unannounced. “Call us,” he said, “and we can make sure the auditors are real,” as there have been some cases of scammers posing as auditors.
Bartlett said that his firm received a certified letter from the South Carolina Attorney General’s office two to three weeks before the examiners arrived. Duncan said it took her “days to determine why” the auditors had decided to visit her firm. It turns out the FINRA examiners were primarily interested in how the branch supervised its advisors.
Pinnock said that his audit was not a complete surprise, since Commonwealth had already warned him that because of the size of his practice (Sterling Financial is Commonwealth’s largest West Coast branch) and its business model—“we have lots of alternative investments and annuities”—Sterling would likely be audited. “They were looking at our blend of business,” Pinnock recalled, and in particular wanted to know what percentage of client assets were in alternative investments.
Hagberg said there’s an important lesson to be learned from the exams. “The focus” of FINRA “this year was on nontraded products: REITs, business development companies [BDCs], annuities and IRA rollovers.”