FINRA Examination Program Improvements

Background

Examinations are central to FINRA's regulatory operations, and they are one of the principal means by which the organization acts to protect investors and promote market integrity. Another goal for FINRA's examinations is to provide value to firms in terms of feedback on areas for improvement and best practices based on insights we have gathered from examining others in the industry.

FINRA has continuously sought to improve the effectiveness and efficiency of its examination programs, an effort that has accelerated under FINRA360. The firms we supervise have communicated a number of concerns to us about their examinations. They range from a desire to move away from a "one-size-fits-all" examination program to a more risk-based program to identifying certain elements of the examination process that cause unnecessary friction in the day-to-day professional interactions between firms and examiners. After careful analysis and review of stakeholder input, FINRA is adopting new measures to enhance the examination programs operated by Member Regulation and Market Regulation, and strengthening other measures already in place.

Based on input from our staff, member firms and other stakeholders, FINRA has concluded that these enhancements will make FINRA a more effective, agile and risk-focused regulator. These enhancements also will improve information sharing with firms, improve the process for information requests, improve examiner expertise, and reduce duplication and gaps in examination programs. FINRA is continuing to evaluate the operation of its entire examination program, and expects to continue to advance this program of improvement.

Enhancing the Risk-based Examination Framework

FINRA is continuing to implement a risk-based framework designed to better direct and align examination resources to the risk profile and complexity of its member firms. Central to this effort is an ongoing and evolving risk-monitoring program, under which each member firm is assigned a regulatory coordinator responsible for communicating regularly with the firm, understanding its business, and identifying potential risks to the firm, investors and markets.2

For the 2018 examination cycle, FINRA has evaluated how resources are deployed and is focused on ensuring that we direct our attention particularly to high-risk firms, branch offices and registered representatives. The changes to the examination program will result in several benefits for investors, firms and the broader marketplace.

  • The depth and breadth of examinations under this planning framework will more closely match the business model, activities and risk of the firm being examined, avoiding a "one-size-fits-all" approach.
  • Member firms will continue to be examined at least once every four years. Higher risk firms will be examined more frequently based on FINRA's identification and assessment of risks at a member firm and other regulatory commitments, with the riskiest firms being examined at least annually. We will eliminate historical labels such as "2- or 3-year firm" when talking about examination frequency and continue to do an appropriate risk-based examination of every firm at least once every four years.
  • To support this enhanced examination framework, FINRA will continue to strengthen its risk-monitoring program, which informs the assessment of a firm's risks for purposes of an examination and provides the foundation for executing regulatory responses outside of a calendar-based examination—including cause and sweep examinations.
  • The enhanced examination framework also will incorporate process improvements developed in recent years, such as procedures to help avoid overlapping examinations, and measures to ensure examinations are appropriately scoped.

FINRA also will continue to leverage technology in its examinations, with a focus on facilitating more work off-site and conducting more efficient, focused examinations while on-site. In particular, FINRA will continue its efforts to analyze specific data from a firm about its potential risks before arriving on-site, enabling the on-site portion of an examination to be completed with greater speed and efficiency. In 2017, we conducted a pilot electronic off-site examination program to leverage our ability to use our technology and expertise to do more oversight from our offices. We conducted 263 examinations pursuant to this program and will use the lessons learned as our program evolves.

Improving Information Sharing With Member Firms

FINRA recognizes that the information developed in the course of risk monitoring and examinations can be useful for member firms looking to improve their compliance efforts and proactively remediate potential risks, and sharing such information where appropriate can in turn benefit investors and markets. Accordingly, FINRA is committed to performing its examinations consistent with the following policies to reinforce existing information-sharing channels and develop new means for member firms to benefit from our broader regulatory insights that transcend individual examination interactions.

  • Produce and publicize an annual Examination Priorities Letter through the FINRA website and other methods, so that member firms and other stakeholders understand the organization's evaluation of risk areas across the industry.
  • Produce and publicize an annual Examination Findings Report that identifies prominent risk areas across recent examinations and provides general observations on effective practices FINRA has observed at member firms to address those risk areas.
  • Produce trend and peer analyses in the annual Risk Control Assessment Summary Report made available on FINRA's Firm Gateway so that firms can better understand how their operational profile and potential risks align with the broader industry.
  • Maintain a Small Firm Helpline to augment the relationships of small firms with their regulatory coordinators and further facilitate their ability to obtain information from FINRA about their questions and issues of concern.
  • Provide guidance and facilitate escalation of any questions or concerns about an examination by making the management team for the examination available to a member firm throughout its examination. Ensure that the key individual managers for an examination are clearly identified to the firm prior to the examination beginning and encourage firms with questions or concerns about the examination to reach out to these managers to discuss them.3
  • Facilitate a dialogue between the examination team and the firm regarding examination findings. Absent ongoing investor harm, this dialogue includes providing the firm with transparency about the nature of any preliminary findings and offering the firm a reasonable opportunity to respond before FINRA makes any final decisions on exceptions and disposition of the matter.
  • Hold forums with FINRA district offices and firms to maintain ongoing communication regarding the examination and risk-monitoring program.

Improving Processes for Information Requests

FINRA also recognizes that the process of collecting and submitting information required for an examination can require a significant investment of time and resources by member firms. Focused information requests help improve FINRA's communications with firms and better inform FINRA's risk monitoring and examination program. Accordingly, FINRA is committed to performing its examinations consistent with the following policies to enhance the efficiency of how information is requested from member firms in the course of an examination.

  • Use Request Manager4 for all information requests made in connection with examinations. FINRA also expects to extend its use of Request Manager to requests from regulatory coordinators with respect to their monitoring responsibilities wherever possible. While FINRA may make information requests of a firm outside of an examination using means other than Request Manager, FINRA will continue to seek to minimize such instances.
  • Enable firms (as many have requested) to designate a single point of contact for all communications about examinations. FINRA expects to enhance Request Manager in 2018 to facilitate this designation, and will continue to use a single point of contact at the firm for such communications wherever possible.
  • Provide firms flexibility as to the data format they use to submit data in response to targeted information requests, and seek wherever practical to accept data in the format (e.g., Excel) in which a firm retains it. FINRA is committed to working with firms to address any practical challenges arising from differences between the data format used by a firm or its vendor and the data format required for regulatory purposes.
  • Make information requests that clearly identify the FINRA department or exchange client making the request.5

FINRA also will review its protocols for setting the scope of information requests and take steps to appropriately match the time provided for a response to the scope of the request.

Examination Program Structure

An additional item for review is the future structure of the examination program. In 2018, we intend to analyze and decide on the optimal organizational framework for the examination program—which could include enhanced coordination among examination activities or greater integration. We intend to create and begin to implement a "roadmap" that thoughtfully and methodically builds toward the identified future structure.

Improving Examiner Expertise in Member Firm Operations and Risks

Effective examinations depend on an examination staff that is conversant in the operations and risks of the firms that are being examined. As firms and markets continuously evolve, so too must the skill set of FINRA examiners. Accordingly, FINRA is expanding its efforts to ensure that the training and support it provides its examiners are sufficient for the work demanded in this ever-changing environment.

  • FINRA is building a uniform training program for new examiners, and enhancing examiner training broadly to improve understanding of different business models and risks.
  • FINRA will work to provide opportunities for its examiners to take the licensing tests it administers for industry participants, including the Securities Industry Essentials Exam that will be implemented on October 1, 2018.
  • FINRA is exploring new ways to leverage the expertise of firms, fellow regulators and other market participants to help better train examination staff.

Reducing Unnecessary Duplication and Gaps

FINRA360 continues to consider a number of further changes to increase the efficiency and effectiveness of the examination program, including pilot programs or other changes that would address any overlapping functions or gaps in the program. As this programmatic work advances, FINRA is committed to identifying—before an examination begins—any potential unnecessary duplication or gaps in individual firm examinations, and seeking to address any such duplication or gaps. At the same time, FINRA continues to encourage firms to notify us when an examination begins if another regulator has recently been active in an area scheduled to be covered by that examination.

Summary of Actions

  • Began using a planning framework for FINRA's calendar-based examination programs in 2018 so that the depth and breadth of examinations under this planning framework will more closely match the risks of the firm being examined, avoiding a "one-size-fits-all" approach.
    • Subject to the results of FINRA's ongoing risk monitoring, member firms will continue to be examined at least once every four years.
    • Higher risk firms will be examined more frequently based on FINRA's identification and assessment of risks at a member firm and other regulatory commitments, with the riskiest firms being examined at least annually.
    • The enhanced examination framework also will incorporate process improvements developed in recent years, such as procedures to help avoid overlapping examinations, and measures to ensure examinations are appropriately scoped.
  • Strengthened, and will continue to enhance, FINRA's risk-monitoring program to support the enhanced examination framework.
  • Published the Examination Findings Report in December 2017.
  • Implemented a Small Firm Helpline to augment small firms' relationship with their regulatory coordinators and further facilitate their ability to obtain information from FINRA about their questions and issues of concern.
  • Create and begin implementing a "roadmap" that thoughtfully and methodically builds toward an integrated examination program.
  • Continue to leverage technology in examinations, with a focus on facilitating more work off site and conducting more efficient, focused examinations while on site.
  • Use Request Manager for all information requests in connection with examinations.
  • Extend Request Manager to include requests from regulatory coordinators with respect to their monitoring responsibilities wherever possible.
  • Enhance Request Manager in 2018 to enable firms to designate a single point of contact for all communications about examinations.
  • Review protocols for setting the scope of information requests.
  • Provide firms flexibility as to the data format they use to submit data in response to targeted information requests, and seek wherever practical to accept data in the format (e.g., Excel) in which a firm retains it.
  • Build a uniform training program for new examiners and enhance examiner training broadly to improve understanding of different business models and risks.
  • Provide opportunities for examiners to take the licensing tests FINRA administers for industry participants, including the Securities Industry Essentials Exam that will be implemented on October 1, 2018.
  • Explore new ways to leverage the expertise of firms, fellow regulators and other market participants to help better train examination staff.

 


2. FINRA provided more information about the risks it considers in this monitoring program in a video for member firms, available at: www.finra.org/industry/few-minutes-finra-nine-risks-inform-finras-examination-and-surveillance-program.

3. Firms may also continue to raise any concerns with the Office of the Ombudsman, which reports to the Audit Committee of the FINRA Board of Governors. Information is available at www.finra.org/about/office-ombudsman.

4. Request Manager is a FINRA-built software tool that facilitates the electronic exchange of information between firms and FINRA. With Request Manager, which is available via Firm Gateway, firms are able to securely submit, manage and track information requests.

5. FINRA provides services to certain equities and options exchanges, including market surveillance, examinations, investigations and disciplinary actions. For more information, see www.finra.org/industry/few-minutes-finra-nine-risks-inform-finras-examination-and-surveillance-program.