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Regulation and Compliance > Federal Regulation > FINRA

FINRA to Revamp Exam Program

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The Financial Industry Regulatory Authority plans to release by year end its first exam findings report and announce in the first half of 2018 how it plans to revamp its exam program, according to FINRA CEO Robert Cook.

“We’re looking at a series of process improvements in our examination program, particularly our ‘cycle’ examination program, with a view to announcing those sometime in the next few months,” Cook said Tuesday during a FINRA Unscripted webcast.  

The self-regulator, Cook said, is also “taking a broader look at our exam programs. We have three different examination programs,” he explained, noting that some of the exam programs were “never fully merged” after FINRA was created in 2007 from the consolidation of the member regulatory functions of the National Association of Securities Dealers and the New York Stock Exchange.

“We’re looking at whether that would make sense to integrate those programs in some way or establish ways to make them more consistent. That’s a significant undertaking,” he said, which is akin to FINRA’s recent announcement that it was merging its enforcement groups.

“We’re still going through the process of figuring out what would be the right structure for the exam groups longer-term,” Cook said. “That will be something hopefully in the first half of next year we could announce a decision on.”

The exam revamp comes as part of the feedback FINRA has gotten from its top-to-bottom review of the regulatory organization via its FINRA360 initiative.

Susan Axelrod, head of regulatory operations — including FINRA’s exams — announced on Oct. 26 that she plans to depart the self-regulator to seek other opportunities in the private sector.

Axelrod will remain in her current post until Jan. 5, 2018, to help with a smooth transition and to continue to implement key organizational initiatives, according to FINRA.   She will then assume the role of senior advisor to Cook through the end of April.

‘Cycle’ Exam Focus

Under FINRA’s cycle exams, BD firms are examined on a one- to four-year cycle. The cycle exams are distinct from “cause” exams, which are prompted by a particular issue.

Reassessing the cycle exams would be an attempt “to respond to some areas that firms have identified where maybe we’re not being as efficient as we can be or where we’ve identified areas where we could engage more efficiently with firms to better allocate our resources, to make sure we’re going after risky activities,” Cook said.

FINRA consolidated its enforcement functions into a new, unified group led by Susan Schroeder, the new executive vice president and head of enforcement.

The new unit brings together two distinct enforcement teams at FINRA: one handling disciplinary actions related to trading-based matters found through Market Regulation’s surveillance and examination programs, and the other handling cases referred from other regulatory oversight divisions, including Member Regulation, Corporate Financing, the Office of Fraud Detection and Market Intelligence, and Advertising Regulation.

Exam Findings Report an ‘Experiment’

Cook said the new exam findings report was requested by broker-dealer firms.

Broker-dealers said they’d like FINRA to publicly report on exam findings, as it does with enforcement actions. They want to know what FINRA is “seeing more generally” in its exams, Cook said.

For BDs, “the idea is, ‘if I don’t get examined this year, but FINRA has seen things that might be relevant to me — a new product that needs to be focused on, that’s a new trend in the industry I need to focus on — I can get ahead of that,’” he continued. “That’s a good point.”

While FINRA intends to issue the report annually, “it’s a bit of an experiment,” Cook said. “We want to be very thoughtful about what we put out in this report, so it’s useful and in cases where it’s appropriate, offer ideas about best practices but also not to stray too far into the area of telling people they have to do something when that might not be appropriate for them.”

FINRA hopes to get feedback on the initial report, he continued, “and it may evolve over time. If people find it useful, of course, that’ll be the main test and we’ll continue issuing it. The format may change over time based on the feedback we get.”

— Check out FINRA Warns BDs of Impending AML Rule Compliance Deadline on ThinkAdvisor.


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