It's the call that makes firms cringethe one in which a regulator announces it is coming for a branch office visit.
The Financial Industry Regulatory Authority has put more firms on notice that they should expect their branch office doorbells to ring frequently. In the past two years, the regulator has changed its approach when conducting examinations, favoring branch office inspections over the home office visits that it used to emphasize, said Susan Axelrod, executive vice president of regulatory operations at FINRA. She made the comment at the group's annual conference in May in Washington, D.C.
"We thought being in the branches at the point of sale, being able to interact with the branch manager and being able to interview brokers ... was a better, smarter use of our time," Axelrod said. The result is that FINRA is now on target to conduct 865 branch office examinations this year. That is up from between 450 to 500 two years ago.
The types of activity that could bring about one of those visits varies. According to Axelrod, FINRA is looking at broker disclosures, complaints, outside business activities and whether risky products are being sold.
Two other actions that can definitely cue a branch office visit: a whistleblower tip or complaint. But how well a firm receives and communicates with those regulators can have a definite impact on how well their branch office visit turns out.
Meet the Regulators
For firms that are on the receiving end of that dreaded phone call from regulators, it can be a test of how well they are prepared, said Kenneth Norensberg, managing director of Luxor Financial Group in New York. "When my clients get the happy call from FINRA, I typically get the following call, which is the CCO on the phone, hyperventilating [into] a paper bag," he joked.
First, Norensberg tells those clients to relax. He assures them that FINRA is not out to get them. Next, he tells them to face the exam head on. While it may be tempting to try and tell regulators what they want to hear in response to questions, honesty is, as usual, the best policy, Norensberg added. "If something was not done right," he said, "simply turn to the examiner and say, 'We didn't do this, and we're happy we found out about it now. We made a mistake. We're going to fix it.'"
Having an open dialogue with FINRA examiners can also result in more leniency for minor violations, Axelrod acknowledged. With technical violations, such as U5s being updated late, the regulator may be willing to avoid writing the firm up for the infraction.
"There's often a real positive response from the firm, which says, 'Wow, look, FINRA's really looking to work with us, not against us,'" Axelrod said. "We've worked hard not to focus on just writing firms up for technical violations."
Expediting the Exam
Don Runkle, a senior vice president and chief compliance officer at Raymond James Financial Services in St. Petersburg, Fla., said that the most recent call for an office inspection ironically came within a week of his invitation to sit on FINRA's panel on the subject. The best way to handle the exam process requires anticipating the needs of the regulators as much as you can, Runkle said. That includes supplying all of the data that might be needed, setting the exam visitors up with PCs and arranging all required access in advance.
"I do set them up in a conference room that's only about 20 feet away from me so I can keep an eye on them and they can have regular access to me," Runkle joked. On top of that, he assigns a point person to handle the visit from start to finish. "I have total confidence in how it's going to go without my presence," Runkle said.
The real secret to acing regulatory office examinations is preparing ahead of time, according to Norensberg. For instance, when a new suitability rule takes effect, firms shouldn't wait three months to put processes in place to comply with the rule. Firms shouldn't stall until employee complaints start piling up before increasing surveillance on potentially probematic individuals.
"These are very simple processes and procedures that can be put into place that make firms better, that make this whole process better," Norensberg said. "If you do that from the get go, things have a habit of going very smooth."
