When FINRA was formed in 2007 — from the consolidation of the member regulatory functions of the National Association of Securities Dealers and the New York Stock Exchange — the regulatory organization had more than 5,000 member firms and 666,000 registered representatives.
Today, over 10 years later, there are 3,700 firms and 630,000 registered reps.
What accounts for this drop in member firms?
According to Susan Axelrod, senior advisor to FINRA’s CEO, it’s partly due to increased regulatory demands on firms and also due to a crackdown on high-risk firms.
Axelrod, who was formerly the head of regulatory operations at FINRA, recently spoke during a luncheon for the Securities Industry and Financial Markets Association’s Compliance and Legal Society in New York City.
She announced on Oct. 26 that she would depart the self-regulator, after 28 years at FINRA and NYSE Regulation, to seek other opportunities in the private sector.
Axelrod will be senior advisor to FINRA CEO Robert Cook through the end of April.
The regulatory demands on firms have increased, and the cost of regulation can make it challenging for some firms to stay in business and can also lead to mergers.
Axelrod also attributes the declining number of member firms to FINRA’s aggressive stance against high-risk firms.
“There are some firms out there that have been high-risk firms that have actually engaged in some pretty serious misconduct involving retail customers where we have used our resources to aggressively work to get those firms out of the business,” she said.
According to Axelrod, some of the FINRA firms that have gone out of business are exactly the firms that no one would want to be in the business.
“When you have people taking advantage of senior investors or churning accounts on a regular basis across the firm, that makes all of us look bad. That’s not the business we want to be in,” she said. “Using our resources to ensure that there are firms going out of business that shouldn’t be in the business due to regulatory disciplinary actions isn’t a bad thing. That’s what our job is.”
After reflecting on how the constituency of FINRA has changed over the years, Axelrod shifted gears and focused on how rapidly changing technology and tools has also changed FINRA.
One of the ways FINRA has evolved is by using data and information to help it target where it wants to use its limited resources, according to Axelrod.
“With 3,700 firms and 600,000-plus registered persons, we also — with a limited workforce — have to think about how we’re spending our time,” she said. “If I go back to 10 or 15 years ago, we’d go to every firm with a checklist and make sure we cover the right topics.”
Today, though, it’s a different world, she added.
For example, the High Risk Registered Rep Program “team, which today is about 10 people, is actually doing the bulk of the high-risk broker examinations based on information and data pointing us to what we want to look at.”
Axelrod thinks over time FINRA will “continue to evolve in that way as a regulator.”
“It’s been tremendous, not to just think about where there may be risk, but to understand where there’s risk based on data and information,” she said.
FINRA is expected to announce in the first half of 2018 how it plans to revamp its exam program.
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