Finra relies on big data for better use of resources

Regulator's chief risk officer says data collection marks a “paradigm shift” in how the regulator conducts examinations.
MAR 04, 2014
Finra is relying on complex data analytics to target examinations of brokers at higher risk for violations, according to the regulator's chief risk officer, Carlo di Florio. The industry's self-regulator is stepping up data collection and hiring quantitative analysts as it looks to better use information from firms to target its examinations, Mr. di Florio said. Instead of running exams based on random samplings that try to find a “needle in a haystack,” the regulator is starting to ask for data ahead of examinations to more selectively target its exams, he said. “That's an incredible shift, and hopefully you all feel that it is a more efficient, focused use of our regulatory resources, “ Mr. di Florio explained at the Securities Industry and Financial Markets Association's Compliance and Legal Society luncheon in New York on Tuesday. “That paradigm shift is a real new day in regulation.” Over the past year, the Financial Industry Regulatory Authority Inc. has been piloting a number of data analytics efforts designed to make the process more efficient. Mr. de Florio, who was hired last May out of a similar role at the Securities and Exchange Commission, helped establish the regulator's department of risk and strategy, which oversees three teams focused on improving the risk-based platform. As part of that strategy, Mr. di Florio is bringing on experts in quantitative analysis, econometrics and data sciences to comprise what he called his “quant shop,” which operates as the external risk team. They will focus on determining what data to look at in order to determine which branches or brokers to visit. Mr. di Florio has also helped establish two teams that report to Finra executives about how Finra can better streamline its examinations under a risk-based approach. One will focus on making sure that resources within the firm are allocated effectively and the other will focus on how to partner with outside firms and other ways of improving the process, Mr. di Florio said. The end goal is that the programs reduce the amount of time examiners spend out in the field in branch offices examining parts of the firm that may not be as important. “Finra is always looking for ways to be more efficient,” Daniel Nathan, a partner at the law firm of Morrison Foerster. “It's a change from what use to be called a 'check the box approach' from looking at everything to a risk-based approach that looks only at areas that might pose a risk.” Finra collects information on products, services, clients and brokers from surveys firms fill out, such as the Risk Control Assessment survey, which is voluntary. In addition, since October, Finra has been working on a pilot program in which a few firms have uploaded additional data prior to exams so that examiners can identify potential red flags ahead of time. The regulator has also issued a regulatory notice requesting comments on a new Comprehensive Automated Risk Data System that would automate what kind of data and how often it has to be collected from firms, although that would be more comprehensive and is farther off, Mr. Nathan said. The feedback from firms who submitted data ahead of time has been initially positive, but the issue will be making sure everything runs smoothly for everyone, according to Andrew Sidman of Bressler Amery & Ross, who represents claimants in investigations and disciplinary proceedings by regulators. “The feedback that we hear from firms is that some folks feel that the risks assessments and the data downloads have helped the exam process and made it more efficient,” he said. “Others seem less certain, so hopefully as this evolves, the process is tweaked and gets better.” The other risk in relying on firms to submit data is ensuring that firms are providing the regulator with a full picture of their operations, said Brian Hamburger, chief executive of MarketCounsel, a compliance consulting firm. “Bad guys aren't known for filing truthful reports,” Mr. Hamburger said.

Latest News

Americans share confusion, concerns ahead of Social Security's 90th anniversary
Americans share confusion, concerns ahead of Social Security's 90th anniversary

Surveys show continued misconceptions and pessimism about the program, as well as bipartisan support for reforms to sustain it into the future.

The advisor’s essential role as alternative investments go mainstream
The advisor’s essential role as alternative investments go mainstream

With doors being opened through new legislation and executive orders, guiding clients with their best interests in mind has never been more critical.

Advisor moves: Raymond James snags advisor teams from RBC, Wells Fargo, Thrivent
Advisor moves: Raymond James snags advisor teams from RBC, Wells Fargo, Thrivent

Meanwhile, Stephens lures a JPMorgan advisor in Louisiana, while Wells Fargo adds two wirehouse veterans from RBC.

Private equity’s courtship of retail investors irks pensions, endowments
Private equity’s courtship of retail investors irks pensions, endowments

Large institutions are airing concerns that everyday investors will cut into their fee-bargaining power and stakeholder status, among other worries.

J.P. Morgan Securities on the hook for $1.1M to advisor in back-pay dispute
J.P. Morgan Securities on the hook for $1.1M to advisor in back-pay dispute

Fights over compensation are a common area of hostility between wealth management firms and their employees, including financial advisors.

SPONSORED How advisors can build for high-net-worth complexity

Orion's Tom Wilson on delivering coordinated, high-touch service in a world where returns alone no longer set you apart.

SPONSORED RILAs bring stability, growth during volatile markets

Barely a decade old, registered index-linked annuities have quickly surged in popularity, thanks to their unique blend of protection and growth potential—an appealing option for investors looking to chart a steadier course through today's choppy market waters, says Myles Lambert, Brighthouse Financial.