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Congress Grills FINRA

FINRA CEO appears before House Financial Services Subcommittee oversight hearing

Testifying before the House of Representatives’ Financial Services Subcommittee earlier this month, Financial Industry Regulatory Authority (FINRA) Chief Executive Officer Robert Cook addressed questions on FINRA’s operations and regulatory programs, how it allocates the fines it collects, the regulator’s $1.6 billion reserve fund, and executive pay.

But in prefacing his response, Cook cited the Authority’s evolution over the last 10 years since its creation from a merger of the National Association of Securities Dealers and the regulatory arm of the New York Stock Exchange. He touted recent FINRA developments including:

  • trade reporting for U.S. Treasuries;
  • enhancements to FINRA’s ability to pursue bad actors;
  • reviews of FINRA’s entire set of capital formation rules; and
  • the launch of launched a new initiative to address developments in financial technology.

He also discussed the Authority’s new review program, FINRA360, adding that this self-regulatory review has resulted in new investments in examiner training, new compliance tools for member firms, and a newly consolidated enforcement program.

Making the case for FINRA

Cook called FINRA the first line of oversight for a significant portion of the U.S. securities markets, complementing the work of the Securities and Exchange Commission (SEC). It oversees more than 3,700 securities firms, nearly 160,000 branch offices, and over 630,000 individuals and last year conducted more than 4,100 examinations, brought more than 1,400 disciplinary actions against those who violate the rules and refer fraud and insider trading cases to the SEC and other agencies. Its surveillance systems, he told Congress, process 37 billion market events a day on average and generate billions of additional derived market events by standardizing trading activity across the markets.

Moreover, he continued, under the federal securities laws, FINRA is subject to comprehensive SEC oversight with respect to rulemaking, examinations, enforcement activities. The SEC:

  • approves or disapproves FINRA rulemakings after seeking public comment on FINRA proposals through a notice in the Federal Register;
  • can abrogate, add to, and delete FINRA rules as it deems necessary or appropriate in furtherance of the purposes of the Securities Exchange Act of 1934;
  • hears appeals of FINRA disciplinary actions, which also may be appealed to the federal courts;
  • requires FINRA to keep records and file reports with the SEC; and
  • inspects FINRA regulatory programs regularly to ensure that FINRA is fulfilling its regulatory responsibilities and to mandate corrective action as needed.

In October 2016, the SEC’s Office of Compliance Inspections and Examinations (OCIE) launched the FINRA and Securities Industry Oversight (FSIO) office to provide further oversight of FINRA,

In July 2017, FINRA combined its enforcement programs. And on July 10th, FINRA, working with Treasury, the Federal Reserve, and the SEC, launched its US Treasury securities initiative, Trade Reporting and Compliance Engine (TRACE).

The Authority also has invested in technology to speed the examination and query process and to reduce operating costs.

Broker-Dealer oversight

While fielding questions from Committee members about how FINRA manages the money it collects in fines and its own executive pay, Cook often turned to the progress being made through the Authority’s new-ish FINRA360 program. More importantly, he said, was how FINRA continues to work to enhance its core regulatory programs and ensure they are working effectively and efficiently to provide oversight of broker-dealer operations and the securities markets to protect investors and maintain market integrity. We also bring enforcement actions where there are violations, develop and refine rules that further our mission, and educate investors on the opportunities and risks they may face.

For example, FINRA regularly examines all broker-dealers members with an eye to compliance with its rules, and those of the SEC and the Municipal Securities Rulemaking Board (MSRB). FINRA examines core areas of a firm’s business as well as aspects that present heightened regulatory risk. Specifically, FINRA may:

  • review a firm’s books and records for currency and accuracy;
  • analyze sales practices to determine the firm deals fairly with customers regarding recommendations, executing orders, and charging commissions or markups and markdowns; and
  • scrutinize a firm’s anti-money laundering program, business continuity plans, and financial integrity and internal control programs.

FINRA may also subject members to reviews for compliance with financial and operational requirements, including how they handle customer funds and securities.

In 2016, FINRA conducted nearly 1,400 routine cycle examinations and over 900 branch office examinations in our oversight of member firms. It also conducted over 2,500 cause examinations, initiated due to complaints, tips, referrals or other specific issues.

What does all this mean for you?

FINRA’s not exactly on the run…but it is under the current Congress’ microscope. In an effort to be a “better regulatory citizen,” FINRA has launched a Vendor Directory (Patrina’s listed!!!) and Compliance Calendar. The former is designed to help firms more easily locate compliance-related vendors (like Patrina!).

And, in addition to providing individual firm exam findings reports, later this year, FINRA will provide a new report summarizing key examination findings from across its programs that member firms may use to strengthen their own control environment and address any potential deficiencies before their next exam.

But what about bad actors?

Bad actors are still a top FINRA priority. The Authority recently established a dedicated unit focused on monitoring and examining high-risk brokers using risk-based methodology, which Cook said has had an impact. Of the firms assessed as highest risk in the last five years, more than 40 percent are no longer in the business. Others have taken steps to rectify their exposures. In 2016, he said, FINRA’s enforcement team brought 1,434 disciplinary actions and barred 517 individuals for egregious violations of the securities laws and FINRA rules, and imposed 727 suspensions on individuals. In the first six months of 2017, Enforcement already had barred 288 registered representatives for egregious misconduct, including 25 brokers that were designated as high-risk brokers by OFDMI. Fifty firms were suspended or expelled. And in the last two years (not including 2017), FINRA ordered nearly $123 million in restitution to harmed investors.

Bottom line…

…hearings or no hearings, FINRA is not going anywhere. So, compliance still matters. And that’s why accessing the best tools to keep your firm compliant is still so critical.


So let’s talk (212-233-1155). Ask about Patrina’s comprehensive, 8-module compliance solution and compliant data capture, file storage, and records archiving specifically designed for the financial services community. Be smart. Be covered.