Finra looks to streamline broker-dealer exams

CEO Robert Cook says three examination teams may be consolidated

Mar 20, 2018 @ 2:13 pm

By Mark Schoeff Jr.

Finra could streamline its examination program this year.

Robert W. Cook, president and chief executive of the Financial Industry Regulatory Authority Inc., said the agency is reviewing the structure of its exam function, which involves three teams: sales practice, risk oversight, and operational regulation and market regulation.

"We're going to be looking at whether it makes sense ultimately to consolidate — if so, how — or to coordinate. That's a decision I expect we'll be making this year," Mr. Cook said Tuesday at the Securities Industry and Financial Markets Association Compliance & Legal Society conference in Orlando, Fla.

The move would be a further step in the "enhanced examination framework" that the broker-dealer self-regulator adopted this year, according to Mr. Cook. Under that initiative, Finra is trying to make its exams more risk-focused, choosing firms based on their business models and investor-protection dangers they present.

The changes won't affect the frequency of Finra's examinations of its approximately 3,700 members.

Finra is "still examining every firm on an every-four-year backstop basis, but moving away from designating firms as 1-, 2-, 3- or 4-year cycle firms [to] instead focusing on [whether] they're a this-year firm or not based on their risk profile," Mr. Cook said.

Finra has taken on more responsibility for broker-dealer examinations over the last two years, as the Securities and Exchange Commission has shifted about 100 of its examiners from broker examinations to investment-adviser examinations in order to increase coverage of advisers.

"In the Finra space, oversight is enhanced, but I think it's been very constructive," Mr. Cook said.

Examinations tend to be one of the points of tension between Finra member firms and the regulator. The changes to the examination program emanate from the Finra 360 self-assessment Finra launched a year ago. A progress report on the initiative will be released later this month.

Mr. Cook said firms should talk to Finra examiners if they feel an exam wasn't fair. The examiners' contact information is included in the report.

"I do encourage you to do it, if you think that the outcome you're getting is not right," Mr. Cook said. "It's there for a reason. People do it, and your concerns will be taken seriously."

Sometimes exam findings lead to enforcement. Finra is looking at remediation approaches beyond fines, according to Mr. Cook.

But that effort isn't the reason why the amount of fines have declined from a record $173.8 million in 2016 to about $73 million in 2017, according to a recent report by the law firm Eversheds Sutherland.

"The goal of this approach is not to have lower fines, per se," Mr. Cook said. "I would not read anything into the lower fines for 2017 — just as 2016, which had a record number of fines. There are so many factors that govern that, that are well beyond Finra's control."

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