Finra announces consolidation of examination functions

Finra has streamlined its examination operations and will begin reviewing brokerages based on their business models next year, the broker-dealer regulator announced Thursday.

The Financial Industry Regulatory Authority Inc. is unifying what had been three different examination functions — business conduct, financial, and trading compliance — into one program. Under the new system, Finra member firms will be grouped into one of five main business models: retail, capital markets, carrying and clearing, trading and execution, and diversified.

Each main group will be divided into subgroups to “more precisely categorize firms with similar business models and activities,” Finra said in a statement.​

In addition, each Finra member firm will be assigned to a Finra staff member who will serve as its “single point of accountability” for risk monitoring and examinations.

Finra began the overhaul of its examination program last October. The effort stems from the Finra 360 self-review initiative launched in 2017 by Finra CEO Robert W. Cook.

“Implementing a unified program structure will help make us a more agile and risk-focused regulator, able to direct our expertise and resources in a more tailored way,” Bari Havlik, Finra executive vice president for member supervision, said in the statement. “As a result, we expect to continue to become more effective at examining firms for compliance and protecting investors.”

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The new system likely will create more lines of communication with Finra, said Marlon Paz, a partner at Mayer Brown.

“This could be very positive for the industry,” Mr. Paz said. “This will lead to a greater sense of understanding between the member firms and Finra staff, which has been improving.”

The new system also should help ensure that Finra examiners have a better grasp of how firms operate. For instance, examiners won’t ask an institutional firm about retail clients or a noncustody firm about client assets.

Firms get tired of having to explaining themselves again and again to examiners who need to get up to speed, said Stephanie Richards, senior manager for risk advisory services at accounting firm Kaufman Rossin.

“The difference will be that whoever is surveilling them or examining them will specialize in the business they engage in,” Ms. Richards said.

Fina regulates more than 3,600 brokerages and 630,000 registered representatives.

Related Topics: Financial Industry Regulatory Authority