During this time of year, many firms are working on wrapping up their annual compliance programs with respect to their registered reps. by conducting annual compliance meetings, meeting with the brokers, and having the brokers complete written compliance questionnaires. Unfortunately, some firms fail to ask the right questions at this time, and don't get the information that they want and need to fully assess their risks and identify compliance problems.
What are the right questions? Put simply, they are questions that are designed to elicit detail about the brokers' activities beyond a simple yes or no. And, they are questions that are broad, as opposed to narrowly tailored. For example, some bad questions might be: "During the past year, did you participate in any private securities transactions?" and "During the past year, did you have any outside employment?" What's wrong with these question: 1) it assumes that the broker and the firm have the same definition and understanding of what a private securities transaction is or what outside employment is, 2) it doesn't seek to get the information that the compliance department wants.
What do reps. almost always say when they have sold away? Its usually along the lines of "I didn't know it was a security. I was told it was not a security and I did not have to be licensed to sell it." And with regards to outside employment we often hear: "I wasn't an employee, I was an independent contractor," or "I didn't get commissions, I got a finder's fee."
As you put together your questionnaire, make sure you're asking questions designed to elicit the information you need to evaluate problems and risks, and to ensure that brokers are aware of what is and is not prohibited by the firm. Importantly, also remember that following up on these responses is critical to an effective compliance program.
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