FINRA Examiners to Take More Time, to Find Risks

The brokerage industry’s chief regulator said Tuesday that its examiners will spend more time on “open-ended thematic reviews” that can identify where controls on financial risks break down.

Financial Industry Regulatory Authority will use sophisticated risk analysis and examination technology to build models of how different brokerages operate their businesses and collect supplementary income data as well as detailed purchase and sales data, customer data and data about the broker, in the quest to reduce risks, Chairman Richard G. Ketchum said.“We are using more sophisticated risk analysis to help ensure our examiners are asking the right questions when they walk in the door,’’ he told brokers attending FINRA’s annual conference, in Washington. “To help target examination protocols, we are developing comprehensive profiles of your business models and underlying risks. We will also be asking firms to provide detailed securities and financial transactional data, including purchase and sales data, customer data and data about the broker.’’

Ketchum said FINRA had added 20 coordinators to its district staff, for a total of 90 district staff dedicated to the surveillance function. The goal: “a much more in-depth understanding of your business and how it's changing from the standpoint of business model, products and market events.”

FINRA, he said, is using “ both paper and electronic means to verify that customer assets exist” and are being held safely for customers to get ahold of, when needed.

FINRA has drafted a supplementary income statement schedule that will provide it with “a more informed understanding of the drivers” of a given brokerage business. Which means exams can “focus on the areas where you are earning your revenues.”

The broader data collection will expand over the next two to three years, so FINRA can develop profiles of firms that can be subjected to risk and compliance scenarios and analyzed.

“These procedures will enable our examiners to be more effective when it comes to identifying the issues that deserve their attention,” he said. “Our examiners will devote more time to understanding risks and how well they are managed or mitigated. The new examination technology we are developing will place greater emphasis on open-ended thematic reviews that require a more complete understanding of your business and the areas that are vulnerable to breakdowns in controls.”