FINRA CEO pledges changes to exams, help for small firms
WASHINGTON — A year into FINRA’s comprehensive self-evaluation and reform program, CEO Robert Cook says the regulator is trying to ease costs and burdens on the small firms that make up the vast majority of its membership.
“Many of our smaller firms are just concerned about the day-to-day running of their businesses and compliance with the rules,” Cook said at FINRA’s annual conference on May 21. “Their priorities for FINRA often diverge from those of professional commentators from inside the Washington beltway or Manhattan, who have never worked at a small broker-dealer.”
FINRA has made its examinations more focused on high-risk firms, and the regulator also pledged to take over its required checks of bankruptcies, judgments or liens against incoming advisors’ U4 filings from member firms. Cook promised further policy changes in the second year of the FINRA360 program.
About 3,400 of FINRA’s roughly 3,700 member firms have 150 or fewer registered representatives, and Cook’s team has fielded about 800 telephone calls from small firms since launching a dedicated hotline for them in January, he says. FINRA believes the changes will help the organization better protect clients, as well.
“These aren’t necessarily flashy or even easy for those who are not in the industry to understand or appreciate, but we think they are very meaningful for many of you in this room, and they respond to your feedback,” Cook said. “We can reduce unnecessary burdens on firms, and we can enhance investor protection, all at the same time.”
Banks such as UBS aim to offer money managers refuge from jittery markets by combining bonds with more exotic options.
Clients thought they were investing in real estate developments that would be flipped for profit.
The firm failed to accurately describe the costs and benefits of exchanging variable annuities and recommended exchanges without knowing if they were suitable, FINRA said.
Cook estimates the bankruptcy checks by the regulator will save firms tens of millions of dollars in vendor payments and late fees. Starting in July, FINRA will check advisors’ financial disclosures within 15 days of their submission of a Form U4 application to register with a firm or transfer their registration.
As an example of further outreach to smaller firms, Cook cited a recent conference call held with 788 staffers from member firms about FINRA’s review of guidelines on outside business activities. He hopes to hold similar calls on other issues in coming months.
The regulator had released a progress report in April on FINRA360, noting that it no longer classifies firms based on the year of their last so-called cycle exam every four years. Instead, Cook says FINRA will make a decision each year on whether to examine a firm, based on its risk levels.
FINRA has also tapped a new executive tasked with leading its member regulation services, which include exams and other surveillance, after veteran executive Susan Axelrod left for a post at Merrill Lynch. Former Charles Schwab Chief Compliance Officer Bari Havlik replaced Axelrod on April 30.
Member firms will still receive cycle exams every four years while getting so-called cause exams at any time, according to FINRA, which says it’s attempting to address concerns raised by firms about the exam process. The regulator conducted 1,492 cycle exams and 5,407 cause exams in 2017.
FINRA hopes to direct its resources toward what Cook called the “highest-risk firms, the highest-risk branches and the highest-risk registered reps” while ensuring that the depth of the exams more closely reflect firms’ businesses and risks, he says.
“Firms will be examined more frequently based on how we identify and assess risks, and the riskiest firms will be examined at least annually,” Cook said, vowing more improvements in the future. “I’m not declaring victory here when it comes to our exams, because I think there’s actually more work ahead of us than behind us.”