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.
