1. Who is subject to an on-site inspection?
Section 13-1 of the Texas Securities Act provides that all registered dealers and registered investment advisers are subject to on-site inspections of their records.
2. Who conducts inspections?
Inspections are conducted by duly authorized representatives of the Securities Commissioner, who consist of personnel from the Inspections and Compliance Division of the State Securities Board (Inspection Staff).
3. Are inspections scheduled in advance?
Yes, inspections are generally scheduled in advance. However, at times some inspections may be unannounced wherein the Inspection Staff will appear at the office of a registered dealer or investment adviser and announce their presence for purposes of an inspection.
4. When are inspections conducted?
Inspections are conducted during the regular business hours of a registered dealer or investment adviser.
5. Are branch offices subject to inspection?
Yes, all offices of a dealer or adviser are subject to on-site inspections, including branch offices.
6. What is the purpose of the inspection?
The purpose of the inspection is to ensure that the dealer and its agents or the investment adviser and its representatives have complied with the Texas Securities Act and the Rules and Regulations of the State Securities Board.
7. Does an inspection indicate wrongdoing by the dealer or investment adviser?
No. The fact that an inspection is being conducted should not be deemed an indication of wrongdoing by the dealer or its agents or by the investment adviser or its representatives.
8. How is an inspection conducted?
At the beginning of the inspection, the Inspection Staff will identify themselves. They will then identify personnel working at the office and ask for the location(s) of the dealer's or investment adviser's records.
Inspection Staff will then review the records at the physical location(s) within the office where the records are maintained. They may make copies of the records for subsequent review at the offices of the State Securities Board.
Inspection Staff may ask the dealer's or investment adviser's personnel questions relating to records, compliance procedures, or other matters which the Securities Commissioner has authority to investigate.
In most cases, Inspection Staff will conduct an exit interview with personnel of the dealer or investment adviser at the conclusion of the inspection. This interview may outline some of the issues identified during the inspection.
9. What if records required to be maintained by Board Rules are commingled with records not required to be kept?
As provided in Sections 115.5(e)(9) (Securities Dealers) and 116.5(c) (Investment Advisers) of the Rules and Regulations of the Texas State Securities Board, Inspection Staff may review and copy all commingled records.
10. What if records are maintained in an electronic medium?
As provided in Sections 115.5(e)(9) (Securities Dealers) and 116.5(c) (Investment Advisers) of the Rules and Regulations of the Texas State Securities Board, Inspection Staff may access and print such records, or download such records in electronic form. When records are kept on-site in electronic format, the dealer or investment adviser must also have the ability to make those electronic records available for immediate and complete access by Inspection Staff.
11. What happens after the inspection?
Inspection Staff will review the records obtained and may request additional information from the dealer or investment adviser. Generally, upon completion of this review, the Agency will take one of the following actions:
- Send a letter to the dealer or investment adviser closing the inspection;
- Issue a letter of caution addressing violations; or
- Refer the matter to the Administrative Litigation Section of the Inspections and Compliance Division or Enforcement Division for further action.
12. How does the Agency treat information obtained during an inspection?
As provided in Section 13-1 of the Texas Securities Act, information obtained during an inspection will be treated by the Inspection Staff and the State Securities Board as confidential. The information may, however, be provided to other law enforcement or regulatory agencies, it may be used in connection with an official proceeding, or made available in compliance with other applicable law.
13. What happens if a dealer or its agent or an investment adviser or its representative fails to allow immediate access to records or refuses to provide information requested by representatives of the Securities Commissioner?
The inspection may be terminated by the Inspection Staff and the matter referred to the Administrative Litigation Section of the Inspections and Compliance Division for appropriate action.
Failure to allow immediate and complete access to records at the physical location(s) within the office where they are maintained or refusal to provide information requested by Inspection Staff may be grounds for disciplinary action pursuant to the Texas Securities Act, including revocation, suspension, probation, and reprimand of a registered dealer, agent, investment adviser, or investment adviser representative. Further, administrative fines may be assessed against a person or entity that violates the Act by failing to grant access to records as required by the Act and Board rules.
14. Who should a dealer or investment adviser contact with questions or comments regarding an inspection?
The Director or Assistant Director in charge of the office conducting the inspection.