Trying to overcome broker-dealer wariness, the
Financial Industry Regulatory Authority Inc. is beating the bushes to encourage firms to complete a voluntary risk-assessment survey that it says will help streamline exams.
Due by April 9, the survey is available online to Finra member firms and is the first of what will be annual questionnaires. The survey asks about a firm's business model, its products and services, clients, counterparties, underlying risks and controls.
On its website, Finra says the survey is designed to help its examiners “focus on the firms and business areas where risk is greatest, resulting in more-targeted and potentially [more-]streamlined examinations.”
Survey data also will be used to benchmark industry risk controls, Finra says.
FISHING EXPEDITION?
But many in the broker-dealer community are concerned that Finra might be fishing for violations.
If by answering a certain way, “do I open myself up to getting points put on my risk assessment, and have [Finra] come in sooner, or do a targeted exam on some issues?” asked Michael Brown, president of B/D Solutions Consulting.
“I can't imagine a firm will be better off having provided this information,” said Brian Hamburger, founder of MarketCounsel LLC, a compliance consultant.
David Sobel, general counsel at Abel/Noser Corp. and a member of Finra's Small Firm Advisory Board, said Finra officials have assured him that survey results will not be shared with enforcers.
“It is not a "gotcha' tool; it is a tool to better interface with firms,” Finra spokeswoman Michelle Ong wrote in an e-mail.
“Providing this information will be beneficial to firms in terms of more-risk-appropriate levels of examination and better-informed examiners,” she added.
After Finra announced the survey Feb. 27, smaller broker-dealers complained that the questions and terms seemed unclear, and that the overall scope of the survey seemed geared toward larger firms.
“Many of our members found the questions to be confusing; it's wrong to require yes or no responses when more detail would be appropriate,” said Christopher Paulitz, spokesman for the Financial Services Institute Inc., which represents independent-contractor firms.
Since the survey was voluntary, many broker-dealers didn't bother to complete it, observers said.
In response to the complaints, Finra provided more clarification on how to answer questions. For example, firms are now instructed to report only on those business lines they anticipate will contribute 1% or more of gross revenue.
Mr. Sobel, who is also chairman of the National Association of Independent Broker/Dealers Inc., said firms should try the survey again if they were daunted the first time around.
Meanwhile, the Finra district staffs have been contacting firms and urging them to complete the survey.
“It's voluntary, but they want everyone to do it,” said Mr. Sobel, who added that if the response remains low, Finra might make completion mandatory next year.
“Finra's definition of the word "voluntary' is different from the one in my dictionary,” Mr. Brown said.
Ms. Ong wouldn't say how many firms completed the survey.
What happens to a firm if it doesn't fill out the survey?
“Your firm will not suffer any negative consequences,” Finra says on its website. However, Finra may then have “to gather and assess this information during the course of the examination.”
Observers said Finra already can tap some risk-based data from other reports member firms must file. Finra said it has not been capturing the type of risk information for all member firms that the survey seeks.
PROMISES, PROMISES
Skeptics also wonder whether Finra will ever get around to doing risk-based exams.
“Finra has been talking for a decade about moving to a more risk-based exam system,” said Alan Wolper, a partner at Ulmer & Berne LLP and a former Finra district director.
“No one seems to be particularly confident ... that completing the questionnaire will somehow result in shorter, more focused, less intrusive exams,” he said.
“For several years, Finra has been saying that [it will do risk-based exams], but we didn't notice any change,” said Brian Lenart, chief executive of BDL Compliance Consulting Inc.
The survey, though, “looks like a serious attempt to focus on risk,” he added.
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