Finra widens window on exam cycle for some small firms

Those with clean records to be reviewed every four years, board member says

Aug 8, 2019 @ 4:52 pm

By Mark Schoeff Jr.

Finra will widen the examination cycle for some small brokerage firms, according to one of the regulator's board members.

Robert A. Muh, chief executive of Sutter Securities, said in an interview that small firms with a "clean record" — those that haven't demonstrated disciplinary problems — would be reviewed every four years instead of every two or three years by Financial Industry Regulatory Authority Inc. personnel.

Mr. Muh, a small-firm representative on the Finra board, said Finra staff have agreed to the adjustment and that it would start going into effect in the next round of examinations.

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Exams can go on for extended periods, so having them frequently can make it feel as if a new one is starting just as the previous one ended, Mr. Muh said. Stretching the cycle out to four years will provide relief.

"That's a very meaningful savings and break for small firms," Mr. Muh said.

A Finra spokesman referred to comments made by Bari Havlik, Finra executive vice president of member supervision, at the organization's annual conference in May.

In a question-and-answer session, Ms. Havlik said most firms are either on an annual cycle or in the "four-year back stop." As part of its internal reform program, Finra is adjusting its exam frequency.

"We are revisiting that as part of the transformation: What's the right cycle for the different business models?" Ms. Havlik said.

In the same session, Finra chief executive Robert W. Cook said the organization is moving away from the four examination cycle buckets, 1-, 2-, 3- or 4-year, and instead determining whether to conduct exams based on the risk a firm poses.

It's becoming more of a "this year or not" proposition, Mr. Cook said.

The exam cycle change for small firms is being touted by Mr. Muh as one of his accomplishments during his tenure on the board. He is campaigning for re-election. Member firms can cast votes until Aug. 19.

Linde Murphy, chief compliance officer at M.E. Allison & Co. Inc., is challenging Mr. Muh for the small-firm seat. Mr. Muh was nominated by a Finra board committee. Ms. Murphy was nominated by petition.

She agrees that exams can pose a challenge for small firms.

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"Any exam can be burdensome, no matter who the regulator is that's coming to visit you," Ms. Murphy said. "It's our responsibility as small-firm representatives to be able to clearly explain and build cogent arguments about the impact of rules on small firms."

About 3,200 of the approximately 3,700 brokerages registered with Finra are deemed small firms, meaning they have between one and 150 staff members registered with Finra.

Mr. Muh said the firms that are under the most pressure from rising regulatory costs are the very small firms — those with 20 or fewer registered staff.

"If you keep losing small firms, small investors will have more difficulty finding a broker willing to take the time to talk to them," Mr. Muh said.

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