FINRA weighs scaling back in-person portion of cycle exams: CEO

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After taking regulatory supervision remote due to the coronavirus pandemic, FINRA is now considering whether the in-person component of cycle examinations will always be necessary going forward, according to CEO Robert Cook.

The regulator halted the onsite component of its cycle exams on member firms earlier this year, which involved tours of a firm’s offices and meetings with the business and compliance officers.

FINRA typically conducts over 2,000 such cycle examinations a year to determine whether firms are in compliance with federal securities laws, rules and regulations, according to FINRA’s website. During those exams, there is “almost always” an in-person element, Cook said at SIFMA’s virtual Compliance and Legal Forum this week.

But the face-to-face component went out the window with the arrival of the coronavirus.

“It’s basically been a forced experiment in how effective remote exams can be,” he said.

Having now conducted these examinations without a face-to-face component, Cook questioned whether it will ever return in full force — a move that broker-dealers may welcome.

Cook anticipates that FINRA will take a “risk-based approach” and would “decide on a case-by-case basis” whether exams need a face-to-face component. “Obviously, in some cases, it absolutely will make sense,” Cook said. “In other cases it may not be necessary.”

In the conference panel, moderator Ira Hammerman, executive vice president of SIFMA, the advocacy organization for the securities industry, praised Cook for FINRA’s response to the pandemic and emphasized the importance of SIFMA’s “close relationship” with the self-regulatory organization.

Hammerman asked Cook whether the regulator would make permanent changes, offer more relief for broker-dealers and whether it would implement some kind of “pandemic playbook” should there be another emergency situation at this scale.

Cook replied that the regulator may allow firms to extend the deadline for their inspections into 2021, although he questioned how far they could push it back.

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“If we keep extending the deadline, it is just gonna be a snowplow effect where there's more and more of a backlog for people to work through,” Cook said, noting they were working on a proposal with the SEC to allow firms to conduct remote inspections in 2020 and 2021.

“We look forward to working with you on that,” Hammerman said.

In March, the SEC pushed pause on its in-person examinations when they closed their offices and sent employees home to work, as well as granting firms some deadline extensions.

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FINRA SIFMA Compliance Broker dealers Exams Robert W. Cook Financial regulations
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