Internal Audit Team Lead – Timothy E. Allen | Former Special Agent (U.S. Secret Service & DOJ-OIG)
Regulated securities professionals and the brokerage houses that they work for have to conduct regular internal audits to ensure that they are complying with the many laws that apply to their industry. Failing to conduct these audits can leave the company exposed to significant legal liability or can keep the firm from operating as efficiently as it could.
The internal auditing consultants at Corporate Investigation Consulting have extensive experience handling the compliance requirements for securities professionals and brokerages. With our auditors’ help, guidance, and expert services, numerous regulated securities professionals have ensured that all of their SEC compliance needs have been met.
The Many Compliance Requirements Created by U.S. Securities Law
United States securities law is as complex, diverse, and nuanced as the assets that make up the industry. Securities professionals have to keep track of numerous federal statutes. Given recent developments in the securities field, particularly with regard to cryptocurrency, those statutes are being amended, revised, and reconsidered on a near constant basis. Just a few of the most important federal securities laws include the:
- Securities Act of 1933
- Securities Exchange Act of 1934
- Trust Indenture Act of 1939
- Investment Company Act of 1940
- Investment Advisers Act of 1940
- Sarbanes-Oxley Act of 2002
- Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
- Jumpstart Our Business Startups Act of 2012
Furthermore, some of the chief securities statutes, namely the Securities Act of 1933 (15 U.S.C. § 77a et seq.) and the Securities Exchange Act of 1934 (15 U.S.C. § 78a et seq.), delegate lots of responsibility to the United States Securities and Exchange Commission (SEC) to define and enforce the law. This gives the SEC wide latitude to promulgate regulations that further the purposes of those extremely broad laws, imposing further obligations on covered securities professionals and their brokerage firms. These regulations get altered even more frequently than the statutes that underpin them because the SEC does need an act of Congress to amend its regulations.
Together, these laws and regulations create a network of complicated compliance obligations that all broker-dealers need to keep in mind. Breaking any of them or not upholding your legal obligations can lead to invasive scrutiny from the SEC and administrative, civil, or potentially even criminal penalties from the agency. Additionally, brokerage firms can face whistleblower claims that carry huge financial penalties, including treble damages in some cases.
Put our highly experienced team on your side
Roger Bach
Former Special Agent (OIG)
Timothy E. Allen
Former Senior Special Agent U.S. Secret Service
Chris J. Quick
Former Special Agent (FBI & IRS-CI)
Maura Kelley
Former Special Agent (FBI)
Ray Yuen
Former Supervisory Special Agent (FBI)
Michael S. Koslow
Former Supervisory Special Agent (DOD-OIG)
Marquis D. Pickett
Special Agent U.S. Secret Service (ret.)
Internal SEC Audits Need to be Efficient and Thorough
Internal SEC audits are a core component of all SEC compliance measures. Those compliance measures are long and arduous processes that take several steps before internal auditing can be done, including:
- Conducting a gap analysis to determine what business practices must be improved to meet legal requirements and obligations
- Planning compliance mechanisms that meet legal expectations without being unduly onerous to the firm
- Executing those plans in ways that ensure they are as easy to maintain as possible
- Continuing to maintain the implemented compliance measures, often by providing ongoing training to relevant personnel
Only after all of these steps have been taken can the brokerage firm begin conducting internal audits. These audits are meant to ensure that the compliance protocols that were adopted are, in fact, working the way they are supposed to work.
Every internal audit is unique and different, even SEC compliance audits. Audits that examine whether a firm is satisfying its recordkeeping requirements will be very different than those that inspect the firm’s supervisory practices under SEC Rule 3110. The materials that need to be examined and the people that need to be interviewed for each type of audit are completely different, and the goals of the audit are very distinct.
The Potential Legal Threats That Unaudited Firms Can Face
Many broker-dealers and brokerage firm managers drag their feet when it comes to compliance. They frequently wonder why they should take the time and invest the money and other resources into creating or bolstering compliance mechanisms when nothing has happened so far. If it is not broken, they often ask, why fix it?
The answer is frequently that you cannot know that it is not broken until it is too late.
Most brokerage firms that do not take their compliance protocols seriously only discover how inadequate they are when they learn that the SEC has initiated an enforcement action. When this happens, it is too late to avoid the situation where the agency has obtained damning evidence of a civil violation or potentially even a criminal case of securities fraud.
By then, the penalties of noncompliance will have become very real and very pressing.
The precise repercussions will depend on the specific nature of the noncompliance and the securities law or regulation that it allegedly violated. For example, all of the following issues of noncompliance can carry their own unique set of fines, prison time, professional consequences, and other sanctions:
- Antitrust violations
- Securities fraud
- Market manipulation
- Violations of an SEC Rule, such as Rule 10b—5
- Violations of a FINRA Rule
- Insider trading
- Violations of legal obligations under federal anti-money laundering statutes
Regardless of the specific offense being pressed, the future of the brokerage firm is at risk.
Three Frequently Asked Questions About SEC Compliance, Internal Audits, and Corporate Investigation Consulting’s Services
Why Not Use My Firm’s Own Compliance Team to Conduct the Internal Audit?
Lots of securities firms, particularly large ones with enough personnel to handle the workload, have their own compliance team. Many decision makers think that this compliance team can, and should, be tasked with conducting the internal audits of the firm’s compliance protocols.
After all, these are the compliance professionals who created the compliance rules. They should be the ones to audit and review them.
According to the SEC, this is generally an unwise move to make.
Outside auditors will come to the situation with open and unbiased eyes. They are far more likely to see potential flaws in the underlying compliance structure than the people who set up that structure in the first place. They will also be less attached to the existing system, precisely because they were not responsible for its creation. The experience that outside SEC auditors have in conducting these internal inspections for other firms also gives independent auditors an understanding of best practices that can benefit the brokerage firm, in the long run.
What Should I Do After the Audit?
After an internal SEC audit, stakeholders at the brokerage firm will receive a final audit report. This details the nature and scope of the audit, the procedures it followed, the evidence it gathered, and the conclusions that the auditors made.
Acting on the final audit report is essential. If it found that there are noncompliance risks, the firm should take the steps necessary to bring the company into compliance. The internal SEC compliance auditors at Corporate Investigation Consulting can walk you through the process, inform you what needs to be done, and suggest ways to do it.
It is important to act quickly, though. Regulations by the SEC give internal auditors the authority to report noncompliance or wrongdoing that was discovered during an audit to the agency if the findings of the audit are not acted upon within 120 days.
What Sets Corporate Investigation Consulting Apart from Other SEC Compliance Auditing Firms?
There are lots of SEC auditing firms that can provide internal audits for brokerage firms. However, few of them can provide the types of services and expertise that Corporate Investigation Consulting can bring to the table.
Before joining the ranks of our auditing firm, many of our auditors and investigators worked at some of the most powerful law enforcement agencies in the world, including the Federal Bureau of Investigation (FBI), U.S. Department of Justice (DOJ), and the Internal Revenue Service (IRS). Some even had prior careers within the SEC or the Financial Industry Regulatory Authority is a private American (FINRA), the leading agencies that regulate the securities industry in the U.S.
That background gives our investigators an insight into your needs and potential legal exposure that other auditing firms can rarely match. When we conduct an internal SEC compliance audit, we know exactly what the SEC would be looking for if they were to initiate an investigation into your firm because that is exactly the sort of work that our professionals have done in the past. Many of our prior clients have said that this insight and deep understanding of not just securities law but also the practice of enforcing that law is invaluable.
SEC Compliance Auditors at Corporate Investigation Consulting
Avoiding these repercussions is essential. A robust compliance mechanism is the best way to do it. When securities firms take their compliance obligations seriously, create thorough and strict compliance protocols for the organization, and internally audit them regularly to ensure that they are working properly, they can drastically reduce the odds that the SEC accuses the firm of wrongdoing. This does not just avoid the repercussions of a conviction or a judgment against the company. It also avoids the expense and stress of defending against a civil or criminal securities case, as well as the bad reputation that comes with the mere allegation of wrongdoing.
The SEC compliance auditors at Corporate Investigation Consulting have extensive experience guiding stakeholders and decision makers in securities firms across the country through the SEC compliance and internal auditing procedures. Contact them online or call their offices at (866) 352-9324 to get started on an internal audit of your firm’s SEC compliance system.