1. Examination Protocol

2. 2 Selection Criteria  The criteria established for selecting examination targets ensures maximum customer protection for investors. Therefore, it is essential the selection criteria include both “routine” and “for cause” examinations.  It is important to remember that regulation is shared with the SEC and FINRA. Regulators should coordinate examination schedules to avoid duplication.

3. 3 Selection Criteria  Risk-Based Ratings or Sources to be Used in Determining Broker Dealer Examination Targets Recently registered B/Ds and branch offices Recently registered B/Ds and branch offices Firms that sell lower-priced securities or engage in high-pressure sales tactics of thinly traded/capitalized securities Firms that sell lower-priced securities or engage in high-pressure sales tactics of thinly traded/capitalized securities B/Ds or branch offices with multiple customer complaints. This information is available via CRD data downloads B/Ds or branch offices with multiple customer complaints. This information is available via CRD data downloads

4. 4 Selection Criteria Firms or individuals that have entered into Consent Agreements or Final Orders with your agency Firms or individuals that have entered into Consent Agreements or Final Orders with your agency Firms or individuals that have entered into registration agreements Firms or individuals that have entered into registration agreements Referrals from other regulators, agencies or media Referrals from other regulators, agencies or media Advertisements Advertisements Internet postings, Google, blogs Internet postings, Google, blogs

5. 5 Selection Criteria  Examinations are Generally “For Cause” or “Routine” “For cause” examinations are those examinations for which we have information indicating a high probability of violations of our statutes and/or administrative rules. “For cause” examinations are those examinations for which we have information indicating a high probability of violations of our statutes and/or administrative rules. “Routine” examinations are those examinations which provide your agency with an industry presence by determining compliance/non-compliance with your statutes and administrative rules. “Routine” examinations are those examinations which provide your agency with an industry presence by determining compliance/non-compliance with your statutes and administrative rules. You may be asked by the examinee if the examination is routine or for cause. The recommended response is, “I am here to do an examination of your office to determine compliance/non-compliance with our statutes and rules”. You may be asked by the examinee if the examination is routine or for cause. The recommended response is, “I am here to do an examination of your office to determine compliance/non-compliance with our statutes and rules”.

6. 6 Announced vs. Unannounced Examinations  You should ask your supervisor if your agency has a policy to address this area. Unannounced examinations are conducted in the “due course” of a home or branch office’s daily operations. Unannounced examinations are conducted in the “due course” of a home or branch office’s daily operations. Announced examinations may be necessary where firms/branch offices are geographically dispersed or that are non-branch locations, such as within an agent’s home. Announced examinations may be necessary where firms/branch offices are geographically dispersed or that are non-branch locations, such as within an agent’s home. Announced examinations may provide the firm or branch office with an opportunity to “tidy up” or remove records which could lead the examiner to miss violations such as “selling away.” Announced examinations may provide the firm or branch office with an opportunity to “tidy up” or remove records which could lead the examiner to miss violations such as “selling away.”

7. 7 Pre-Examination Research  After selecting the target, you should review internal documents/records, including: The agency’s internal databases The agency’s internal databases CRD records CRD records Previous examination findings, etc. Previous examination findings, etc. Customer complaints received by the agency Customer complaints received by the agency  If your research indicates an open or previous examination, contact should be made with the examiner.  Contact FINRA/SEC/other state(s) to determine recent examinations and findings, if any.

8. 8 Examination Fieldwork  Upon arrival, you should introduce yourself and ask to speak to the manager. Since most firms have a policy requiring notification of a regulator’s visit to the home office, you may be required to wait for a period of time. Since most firms have a policy requiring notification of a regulator’s visit to the home office, you may be required to wait for a period of time.  Bring a copy of your state statutes and rules, which provide examiners the authority to conduct an examination. This information is useful to have should you be denied access to the premises or specific records.

9. 9 Examination Fieldwork  If denied access or asked to postpone the examination, you should contact your supervisor for further instructions.  Similarly, if the branch or firm attempts to limit the scope of your exam for any reason, you should contact your supervisor for further instruction.

10. 10 On-Site Examination/ Review of Records  Background Interview The background interview of the manager provides an overview of the office’s activity – both operational and sales practices – and potential problem areas to review. For example, the manager may indicate there has not been a visit from anyone from the home office in three years. This could indicate supervisory problems. You should be aware the questions on the background interview are not all inclusive. Therefore, you should be ready to deviate from the scripted questions when necessary. The background interview of the manager provides an overview of the office’s activity – both operational and sales practices – and potential problem areas to review. For example, the manager may indicate there has not been a visit from anyone from the home office in three years. This could indicate supervisory problems. You should be aware the questions on the background interview are not all inclusive. Therefore, you should be ready to deviate from the scripted questions when necessary.

11. 11 On-Site Examination/ Review of Records  After conducting the background interview, it may be necessary for the examiner to refine or expand the scope of your review to address concerns raised during the interview.  During the examination, you should review the firm’s financial operations, its books and records, sales practices and supervisory policies and procedures. The financial/operational side, including books and records, should be reviewed to determine that the records are not only accurate and current, but also what they indicate. For example, trade cancellations may be indicative of unauthorized trading. The financial/operational side, including books and records, should be reviewed to determine that the records are not only accurate and current, but also what they indicate. For example, trade cancellations may be indicative of unauthorized trading. Records which are not maintained or poorly maintained may be indicative of the overall operation of the firm/branch office. Records which are not maintained or poorly maintained may be indicative of the overall operation of the firm/branch office.

12. 12 Examination Fieldwork  At the conclusion of the on-site examination, you should leave a list of the documents to be provided to you or inform the firm additional document requests may be forthcoming. Set a specific date the records are to be provided.  Do not leave the examination without having questions answered by staff at the firm. Exit interview: to do or not to do, that is the question. Know your state’s policy before you go to the examination site.

13. 13 Fieldwork Follow-up  After leaving the firm, the main portion of your examination may be just beginning. In addition to possibly obtaining further documentation from the firm, it will be necessary to validate the information in your possession with investors, issuers or other regulators. Additionally, it may be necessary to conduct an analysis on trading and sales practice areas for violations such as suitability, unauthorized trading, and supervision, etc.

14. 14 Sound Examination Practices  Consider using a file management system This system will allow you to manage your documents by keeping a log of each record or type of record that is received in connection with your examination and from whom. (The Who-What-Where-When-How) This system will allow you to manage your documents by keeping a log of each record or type of record that is received in connection with your examination and from whom. (The Who-What-Where-When-How)  Document critical interviews or conversations with a Memorandum of Interview.

15. 15 Sound Examination Practices  As a result of your exam, you may develop a need to contact clients of the firm to obtain information about the activity in their accounts or dealings with the firm. For example, you may have to interview a client to determine the details of a complaint uncovered by the exam process. Be sure you engage victims and the clients early and often. Building a working relationship with both is helpful. Be sure you engage victims and the clients early and often. Building a working relationship with both is helpful. Be careful not to over-promise and under-deliver. Be careful not to over-promise and under-deliver. Don’t wait until you have collected all the documents and finished your analysis before interviewing targets and victims. If a victim won’t testify or their testimony destroys the case, the time you spent collecting and analyzing the documents is wasted. Don’t wait until you have collected all the documents and finished your analysis before interviewing targets and victims. If a victim won’t testify or their testimony destroys the case, the time you spent collecting and analyzing the documents is wasted.

16. 16 Sound Examination Practices  Waiting on documents accounts for a majority of the time it takes to complete an examination. Request in person, by phone and/or send out letters requesting documents as early as possible. Request in person, by phone and/or send out letters requesting documents as early as possible. Be disciplined with your document requests Be disciplined with your document requests Once you have indications there are problems, the document request(s) should be broadened to encompass the records needed to prove compliance/non-compliance with regulations. Once you have indications there are problems, the document request(s) should be broadened to encompass the records needed to prove compliance/non-compliance with regulations.

17. 17 Examination Reports  Examination reports, which are written narratives of your findings, should be completed on all examinations conducted by your office.  The narrative should be sufficient to convey to the reader, usually a supervisor, department attorney or prosecutor, the degree of compliance/non-compliance with the statute and/or administrative rules. The report should contain information detailing the specific regulation that was violated and how it was violated. The report should contain information detailing the specific regulation that was violated and how it was violated. In some instances where violations are not present, or are minimal, the completed examination module with a short memorandum detailing the findings may be sufficient. In some instances where violations are not present, or are minimal, the completed examination module with a short memorandum detailing the findings may be sufficient.

18. 18 Examination Report  The report should also contain documentation to support the violation.  Firm’s own records and/or written admission  Interview/affidavits from investor or other interested parties  Examiner’s analysis (i.e., suitability, churning)

19. 19 Resolution  Examinations are generally resolved through one (or more) of the following means: Closed – no action Closed – no action Firm is sent a guidance or caution letter setting forth the deficiencies and instructing the firm to notify your office of the corrective action taken by the firm to address your concerns. Firm is sent a guidance or caution letter setting forth the deficiencies and instructing the firm to notify your office of the corrective action taken by the firm to address your concerns.

20. 20 Resolution  Referred to Legal If a firm has indicated the willingness to resolve the examination issues, consideration should be given to entering into an agreement with the firm. The form of this agreement would be a Consent Order/ Agreement, Undertaking or other similar document. If a firm has indicated the willingness to resolve the examination issues, consideration should be given to entering into an agreement with the firm. The form of this agreement would be a Consent Order/ Agreement, Undertaking or other similar document. Issuance of an administrative complaint seeking sanctions, including: cease and desist orders, revocation/suspension/denial/restrictions of registrations, administrative fines, and order of restitution Issuance of an administrative complaint seeking sanctions, including: cease and desist orders, revocation/suspension/denial/restrictions of registrations, administrative fines, and order of restitution

21. 21 Resolution  Referral to prosecutor (District/State Attorney or U.S. Attorney) for criminal prosecution

22. 22 Protocol  It is important to remember during an examination that you represent your agency. As such, you should conduct yourself in a professional manner. The following should assist you during an examination: Do not make personal calls to your home or office from the firm’s phone. Do not make personal calls to your home or office from the firm’s phone. Many firms monitor their agents’ telephone calls, so you should assume the firm may listen to your calls.Many firms monitor their agents’ telephone calls, so you should assume the firm may listen to your calls.

23. 23 Protocol Limit your conversation with other examiners to business matters. Limit your conversation with other examiners to business matters. Leave the previous night’s exploits at home.Leave the previous night’s exploits at home. Assume someone may overhear these conversations.Assume someone may overhear these conversations. Do not leave your personal belongings and/or documents obtained from the firm in the office when you go to lunch or leave the office for the day. Do not leave your personal belongings and/or documents obtained from the firm in the office when you go to lunch or leave the office for the day. Most firms will allow you access to most areas of the firm and allow you to use items such as the copy machine. Most firms will allow you access to most areas of the firm and allow you to use items such as the copy machine. If your access is restricted to records or areas necessary to complete the exam, contact your supervisor for instructions on how to proceed.If your access is restricted to records or areas necessary to complete the exam, contact your supervisor for instructions on how to proceed.

24. 24 Protocol Ask questions and be persistent in an effort to obtain information from the firm and/or its employees. Ask questions and be persistent in an effort to obtain information from the firm and/or its employees. Do not hesitate to ask legitimate questions and don’t leave the firm without resolving outstanding concerns you may have.Do not hesitate to ask legitimate questions and don’t leave the firm without resolving outstanding concerns you may have. Be adaptable. Be adaptable. If your examination is assigned as a routine examination and you discover major violations, be prepared to discuss your concerns with your supervisor and document the violations.If your examination is assigned as a routine examination and you discover major violations, be prepared to discuss your concerns with your supervisor and document the violations.

25. 25 Protocol Be thorough. Be thorough. Obtain, review and copy documents necessary to complete your review and document violations.Obtain, review and copy documents necessary to complete your review and document violations. If you can’t obtain all of the documents you need from the firm, leave a list of the outstanding documents requested with the appropriate branch or home office personnel.If you can’t obtain all of the documents you need from the firm, leave a list of the outstanding documents requested with the appropriate branch or home office personnel. Give the firm an adequate amount of time to produce the records.Give the firm an adequate amount of time to produce the records.

26. 26 Protocol  Food items, gifts and gratuities – It is generally not a good idea to accept any of these items from any firm at any time. Acceptance of these items may be perceived negatively and question the objectivity of who ever accepted such gifts. Each state has policies regarding this. Please check with your supervisor.

27. 27 The best examiners are those persons who listen carefully to the responses given to questions they ask and leave no stone unturned during an examination. DON’T BE A CHECK THE BOX EXAMINER!! Remember...