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SEC Launches New FINRA Inspection Team

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The Securities and Exchange Commission has launched a dedicated inspection team to oversee the Financial Industry Regulatory Authority, Marc Wyatt, director of the agency’s Office of Compliance Inspections and Examinations, said Monday.

The new group, FINRA and Securities Industry Oversight (FISIO), which is headed by Kevin Goodman, head of the agency’s broker-dealer exam program, “is now up and running” for fiscal year 2017, which started on Oct. 1, Wyatt told reporters after his comments at the National Society of Compliance Professionals annual meeting in Washington.

During his comments at the event, Wyatt noted that the “significant number” of SEC broker-dealer examiners that shifted this year to examine investment advisors and investment companies prompted the heightened FINRA scrutiny.

“We took resources from the broker-dealer program and moved them into” the advisor and investment company exams, Wyatt said. “As a result of doing that, we’re somewhat more reliant on FINRA. So in relying more on FINRA, we need to make sure we’re enhancing our oversight.”

As of Oct. 1, OCIE has seen a more than 20% increase in the number of IA/IC exams because of new hiring slots that SEC Chairwoman Mary Jo White allocated to OCIE as well as from OCIE’s shifting of examiners.

White has also noted during her time as SEC chairwoman that the SEC has enhanced its oversight of FINRA, “and will continue to do so.”

Over the past two years, Wyatt noted that more than 2,000 new advisors registered with the SEC, joining OCIE’s examination pool. “We want to make sure OCIE is doing our utmost to expand our reach into this key population, and I believe our recent redeployment of staff puts us in the best position to do that.”

Wyatt noted that together, FINRA and the SEC examine 50% of broker-dealers each year.

The new FISIO team includes “roughly 40 people” throughout the country, Wyatt told reporters, and consolidates the SEC’s oversight of FINRA “into a single group.” The FISIO team will oversee FINRA “both in the regional footprint that it [the self-regulator] has and ensuring that it’s fulfilling its mandate in terms of evaluating its member broker-dealers.”

Goodman noted on a separate panel discussion at the conference that in the shifting of examiners, “one-third” of the broker-dealer exam program’s assets were moved “to bolster the exam cycle and scope” of advisors.

Before FISIO, Goodman said that the SEC examined FINRA in two ways: through “programmatic” exams, in which examiners would focus on a particular area within FINRA’s operations” – for instance, exams, enforcement, dispute resolution programs. A separate group was responsible for performing “oversight” exams of FINRA, “to assess the quality of the individual examinations” that FINRA conducts on broker-dealers.

FISIO “will cover both of those functions,” Goodman continued, “combining those two functions into one. … That’s going to be not only powerful but efficient as well.”

How often will broker-dealer compliance personnel see FISIO? “I don’t think you’ll see us terribly often,” Goodman said. “We’re going to try to conduct our oversight examinations of FINRA as much as we can by simply looking at all of their records on how an exam was carried out. If, however, we feel like we need to come in to a broker-dealer to allow us to completely assess the quality of the exam, that’s when you’ll see us. But I anticipate that will be a fairly small minority of the oversight exams.” 

As to advisor exams, Wyatt noted that in fiscal year 2016, OCIE completed more than 2,400 examinations “across all our program areas,”  a more than 20% increase over 2015, and a six-year high. “We will continue to optimize our resources and investment in technology in order to keep pace with the growth, complexity and innovation of the capital markets and our registrant base.”

He noted, however, that the number of exams conducted doesn’t highlight the effectiveness of the exam program. “The information our examiners collect in the course of the exam is invaluable as it may empower compliance staff at a registrant, it may identify a new risk, or it may assist our efforts to inform policy.”

He also highlighted progress on a relatively new approach the exam team has taken with respect to preventing fraud in the advisor population via “newly registered advisor” exams. 

Over the past two years, several SEC regional offices have piloted a program of conducting focused exams of newly registered SEC advisors.

“Based on the feedback from the exam staff and industry, I believe this ‘New Registrant Initiative’ has helped in preventing fraud,” Wyatt said. “These examinations allow examiners to quickly assess whether the new registrant is well informed in the responsibilities that they assume as a fiduciary and as a registered entity, and to provide the firm and its staff with exposure to its regulator.  Today, in all of our regions, when a new investment advisor registers with the Commission, OCIE staff will endeavor to conduct an examination of nearly all these new registrants to gain insight into the registrant’s compliance culture and assess if additional risks should be examined to prevent fraud.”

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