Finra to revamp market examination process for broker-dealers

Organization will center on branch-level activity; canvassing data from providers

Jun 28, 2011 @ 12:52 pm

By Darla Mercado

Finra will take a data-centric approach to performing market exams, pulling reams of information from broker-dealers, insurance companies and clearing firms.

The initiative was announced today by Rick Ketchum, chairman and chief executive of the Financial Industry Regulatory Authority Inc., at the Insured Retirement Institute's Government, Legal and Regulatory Conference in Washington.

“As I go around the country and sit down with our members, the consistent thing I've heard about Finra is the basic concern that while there's a great deal of respect for the examiners and the examination program, there's frustration that the examiners come in and don't understand the firms, that they're not focused on the areas that are most critical to the firm,” Mr. Ketchum said.

As a result, the organization developed a program centered on risk analysis and combined that with increased outreach to broker-dealers at the branch level. Finra had brought on 20 more coordinators to carry out its increased communications with broker-dealers, bringing the total number of surveillance-focused staff to 90, Mr. Ketchum said.

Finra has also been working with major clearing firms and carriers to harvest data for risk analysis. That ought to lead to more pointed examinations, Mr. Ketchum said. “We're digging deeper into areas that pose the most risk to ensure that examiners are asking the right questions,” he added. “We're going to spend more time in our offices than your offices, collecting data.”

Ultimately, Finra would like to develop standard data feeds with other industry members, Mr. Ketchum said.

Most recently, Finra in April canvassed life insurance companies, collecting information to focus on the products most frequently sold by retail firms. In the next few weeks, the organization expects to place a second request to additional variable annuity manufacturers, Mr. Ketchum noted.

An audience member asked the Finra chief if he had noticed a large number of variable annuity sales gravitating toward only a handful of insurers. The lion's share of the VA market belongs to Prudential Financial Inc., MetLife Inc. and Jackson National Life Insurance Co.

“We've noticed it and we're very focused from a manufacturer standpoint with respect to disclosure,” Mr. Ketchum said. “From that standpoint, we're looking at the incentives firms are provided to ensure that they're fully disclosed.” He added that he would try to learn more about the issue.

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