New Finra CEO Robert Cook has struck a popular chord with one of his first initiatives as head of the broker-dealer regulator with a proposal to release a summary report of examination findings.
In a Jan. 4 cover letter to the Financial Industry Regulatory Authority Inc.'s annual examination priorities list, Mr. Cook indicated that the organization will for the first time release such a summary report.
He said that the idea
emanated from the “listening tour” that he launched when he took over leadership of the organization in August.
“I have heard frequently from firms and other Finra stakeholders that it would be useful to learn more about what Finra is seeing through its examination programs,”
Mr. Cook wrote.
The idea is being endorsed by compliance experts.
Brent Burns, a securities and regulatory lawyer in Alpine, N.J., said that publishing the results will increase the transparency of the exam process.
“Finra can only do so many exams at a time,” Mr. Burns said. “But by publishing common exam results, Finra can put all firms on notice of potential lurking deficiencies in their own house.”
Publishing the exam results also will make the reviews more predictable, said Amy Lynch, president of FrontLine Compliance.
“If you're seeing a recurrence in certain types of deficiencies, you know they're looking at the area every time they come in,” Ms. Lynch said.
Although the idea is “constructive,” there also is a potentially big drawback, said Barry Goldsmith, a partner at Gibson Dunn & Crutcher, depending on how Finra uses its findings.
“The risk is that it becomes de facto rulemaking,” said Mr. Goldsmith, head of enforcement from 1996-06 at the National Association of Securities Dealers, Finra's predecessor. “You get a little bit of regulation by enforcement.”
In his cover letter, Mr. Cook also announced another new initiative inspired by his tour. This year, Finra will provide “more, and perhaps different, compliance tools and resources” to help small firms comply with Finra rules, including a “compliance calendar” and directory of compliance consultants.
One consultant said that the effort will make more small firms think about compliance.
“If you can help smaller firms that are resource-constrained by giving them templates, checklists, forms and guidance, it will incentivize them to comply,” said Todd Cipperman, principal at Cipperman Compliance Services. “That's good for everybody.”
Now is a good time for Finra to reach out to small firms because the Labor Department fiduciary rule is spurring some firms, such as independent marketing organizations for insurance products, to become broker-dealers to qualify as a “financial institution” under the rule, according to Ms. Lynch.
“That's the kind of dialogue they need to continue to have with small new member firms,” Ms. Lynch said.
Daxton White, managing partner at White Law Group, cautioned that there is a danger in Finra's catering to small firms because that's where much investor harm occurs. He said it's too easy to start a broker-dealer, which means that many fledgling ones are under-capitalized and lack insurance.
“I think they should be raising the bar and making it more difficult to open a brokerage firm,” Mr. White said. “If a smaller firm can't handle it, they should merge or be bought. The point is to protect investors.”
