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Year in Review: The 2020 Exam and Risk Monitoring Program

March 23, 2021

2020 was a year of great change and transition for FINRA’s Exam and Risk Monitoring Program—and the pandemic wasn’t even the start of it.

On this episode, the first in a two-part series, we hear from Ornella Bergeron, senior vice president of the carrying and clearing and diversified firm groups; Tom Nelli, senior vice president of exams and standards; Bill St. Louis, senior vice president of the retail and capital markets firm groups; and Tim Thompson, senior vice president of the trading and execution firm group on how the program fared in its first year after a major transformation.

Resources mentioned in this episode:

Episode 50: What to Expect: The 2020 Exam and Risk Monitoring Program

Episode 49: A Career Highlight: Exam and Risk Monitoring Program Transformation Update

FINRA Announces Senior Leadership Team Under New Examination and Risk Monitoring Program Structure

Note: The audio was updated on Thursday, March 25, 2021, for clarity.

Listen and subscribe to our podcast on Apple PodcastsGoogle PlaySpotify or wherever you listen to your podcasts. Below is a transcript of the episode. Transcripts are generated using a combination of speech recognition software and human editors and may contain errors. Please check the corresponding audio before quoting in print. 


00:00 – 00:20

Kaitlyn Kiernan: 2020 was a year of great change and transition for FINRA's Exam and Risk Monitoring Program, and the pandemic wasn't even the start of it. On this episode, the first in a two-part series, we hear an update from four leaders of the Exam and Risk Monitoring Program about how the program fared in its first year after a major transformation.

00:20 – 00:31

Intro Music

00:31 - 01:58

Kaitlyn Kiernan: Welcome to FINRA Unscripted. I'm your host, Kaitlyn Kiernan. I'm pleased to welcome to the show today four guests for the first of a two-part series.

All four guests are leaders from FINRA's Exam and Risk Monitoring Program. We have Ornella Bergeron, senior vice president of the Carrying and Clearing and the Diversified firm groups, Bill St. Louis, senior vice president of the Retail and the Capital Markets firm groups. Tom Nelli, senior vice president in charge of executing exams, setting standards across firm groups and quality assurance testing, and then new to FINRA Unscripted we have Tim Thompson, senior vice president of the Trading and Execution firm group. Bill, Ornella, Tim and Tom: welcome to the show!

Bill, Tom and Ornella, you joined us about a year ago on Episode 50 to talk about Member Supervision's new organizational structure built around the five firm groupings determined by firm business models. 2020 was an interesting year for many reasons between COVID-19 and it being the first year of this new structure. But today, for the first episode in our two-part series, I want to focus on how the Exam and Risk Monitoring Program transformation worked in practice. During Part two will return to focus on the impacts of the pandemic on the exam program and then we'll also take a look ahead to priorities for 2021.

So, Ornella, just to kick things off, how did the first year of this new structure go?

01:59 - 03:40

Ornella Bergeron: Definitely a challenging year but considering everything that we went through during 2020 I think it went great. We kicked off the year with implementing our new structure and our new program. The teams had just transitioned to working with new firms, examining new firms and their new manager, and then COVID hit and the risk monitoring teams had to really transition to reprioritizing their work to follow up with firms in terms of the impact of the volatility. We all transitioned to working fully remote. The examiners had to adjust to doing exams remotely.

But I have to say it was amazing to see how the teams came together, helped each other to work through the issues and the challenges that were thrown at us. So far, we've really received good feedback, both internally and externally in terms of our program.

Speaking to Risk Monitoring, we're really starting to see the benefit of assigning firms to firm groupings and sub groupings, we are starting to identify similar issues and trends among similar firms. We're able to follow up with those trends and issues much more efficiently because similar firms are grouped under the same manager and the teams are having really productive conversations, taking what they're learning from one firm, applying it to the other, really see the staffs developing expertise of the firms that they're assigned to, the business lines that the firms are involved in. Externally, we've heard that firms really do like the structure of our program around business lines and noticing that the staff is more knowledgeable of their firm's businesses, and they're asking more relevant questions.

03:40 - 03:45

Kaitlyn Kiernan: That's great to hear. And Tom, how about on your side of things? What kind of feedback have you heard?

03:46 - 04:29

Tom Nelli: Great question, because recently we did a survey to the Exam and Risk Management team going over the seven points that initiated the transformation. And overwhelmingly, the results were very positive. Feedback was "we are on course" and even in areas like technology where we have got to get rid of some of our manual processes, even a follow up on those questions was we were heading in the right direction.

So, given that we were one year into this, overwhelmingly, we got positive feedback. And in the areas that we still need to grow a little Exam and Risk Monitoring folks believe we're heading in the right direction. So, all in all, it's been very positive.

04:29 - 04:43

Kaitlyn Kiernan: Bill, we'll get to COVID-19 more in depth in part two of the series. But at a high level, outside the pandemic, what were some of the biggest challenges in 2020 in the first year of this program?

04:44 - 06:47

Bill St. Louis: Moving from a geographic model to the firm business model way of structuring the program required some shifts in the teams, some movement. So, for example, whereas you may have been a Risk Monitoring person in Chicago and your manager was in Chicago. Now, with the new structure, geography doesn't matter as much. So, your manager may be sitting in Dallas.

So, one of the challenges was just acclimating new teams in the new structure doing all that remotely. And I think we did a very good job with that acclimation. Communication is really the key. So Zoom, Zoom, Zoom all the time. So, a lot of communication amongst the teams.

Another thing that we faced is that some of the firms were a little bit hesitant about dealing with new Risk Monitoring staff. So, I will use Chicago again, you may have been a firm in Chicago, and your risk monitoring analyst was a car ride away, pick up the phone, see each other, etc., etc. Now, your risk monitoring analyst could be in San Francisco or Boca Raton. So, we had to overcome a little bit of that hesitance.

But the two main things that happened this year really helped bridge that hesitance. One is the pandemic, which I know we'll get to later, but that required that we do even more communication with our firms. And I think that helped overcome the hesitance.

And then the other thing was the unprecedented market volatility we saw throughout periods of the year also required a lot of communication. So that very high amount of communication with our member firms, I think went a long way towards bridging any concerns about my risk monitoring analysts is new to me, someone in a different city, etc..

I still think that there might be a little bit of hesitance out there to that, but I think the value of our new structure and the communication really went a long way towards addressing.

06:49 - 07:20

Kaitlyn Kiernan: It seems like the pandemic was a little bit of a blessing in disguise there, and then it leveled the playing field with everyone being remote. On the flip side, Bill, what were some of the greatest successes of this first year?

07:01 - 08:33

Bill St. Louis: The benefits of the structure are very apparent to us, and we are all confident that over time they're going to be even more apparent. So, you're talking to a capital markets firm. It has a question for you about some rule interpretation or some issue that it's facing, maybe pandemic related or not. And it causes the risk monitoring analyst to think, well, that probably applies to the other firms that I'm also monitoring that are in the same grouping. So, we identify issues in a more efficient, seamless manner and we can address those issues in a consistent, seamless manner. It also allows us to escalate issues to Member Supervision senior management, or outside Member Supervision to the Office of General Counsel, in a much more efficient manner than before.

The other thing is we're hand in glove with the examination program, Risk Monitoring is. So, as they identify an issue, they share that information with Risk Monitoring, Risk Monitoring ingests that information and uses it as it monitors similar firms and similar firm groupings. So, it's about issue identification and it's also about educating the risk monitoring analysts about what's happening amongst their subset of firms.

Like I said at the beginning, over time, this is only going to be better and better. We're going to be faster, more efficient in identifying and addressing these issues.

08:33 - 08:57

Ornella Bergeron: Bill talked about being geographic-agnostic and that definitely did pose some challenges, but I also do want to add that I think that was also a benefit because we were able to place folks based on what made the most sense in terms of their expertise and their qualifications. And it also created a lot of opportunities for our teams that didn't exist previously.

08:58 - 09:03

Kaitlyn Kiernan: Tom, on your side of things, what were the biggest challenges for the exam program?

09:03 - 10:26

Tom Nelli: I know we'll be talking about COVID separately. I think one of the biggest challenges was also, to Bill's point, became one of our success stories is the challenge from going to 14 districts where exams could be run slightly different based on the districts and going to a national program.

We immediately identified some inconsistencies in the program. And our challenge this year was to create consistency within that program if it made sense for that grouping of firms. So that was a challenge. We didn't realize how many differences there were in the system. On the flip side to that, with the risk monitoring team and the exam team, we identified those very early on and started making changes to make it more consistent. And I think by the end of 2020, we really have things rolling very efficiently.

Not that we don't need to do more. We definitely need to do more. But we created a culture in which people speak up, and say "Hey, this is a little different. What's the best way to do this?" So that's a success part of the challenge we initially had, and I think we're in a culture where everyone's asking questions of what's the best way to get this done and is this the way to get it done. And that's one of our success stories for 2020.

10:27 - 10:40

Kaitlyn Kiernan: So, we touched on this a little bit, but one of the major points of these changes was to ensure that the exam staff was well versed in a firm's business model going into an exam. How has that worked out?

10:40 - 11:50

Tom Nelli: So, given that 85% of the exam team and the risk monitoring team selected where they wanted to be because of their understanding, their own expertise, I think they're extremely satisfied of where they are and the knowledge they have. And we've witnessed it both in exams and risk monitoring. But we did have a year where folks can move if they were interested in a different area that was open for them. So besides picking what you were passionate about and what you knew best, we also left opportunities for people to expand their knowledge and go into areas they had interest in.

But what I really think we liked about this concept was it was driven by not only the needs of FINRA and how we got to examine and monitor our firms. It was driven by what people's passion was. And I think that went a long way in creating a very rewarding and satisfying employee experience because they had a lot in the input of where they were going to be sitting.

11:50 - 13:13

Bill St. Louis: I agree with Tom. I think the fact that people could select whether they wanted to be in Diversified or they wanted to be in Carrying/Clearing goes a long way towards achieving what we want. What we want is we want people to have a deep knowledge of the firm business models. And our expectation is that that knowledge will turn into expertise over time. So, selecting which area you wanted to be in goes a long way.

Repetition - once you're in that firm group and you're doing those exams over and over of similar firms or if you are in Risk Monitoring you are monitoring similar firms repeatedly, repetition is going to lead to a deeper knowledge of those firms and those business models and the nuances of those business models. And over time, that should lead to greater expertise.

But with all of this, we're also supplementing it all with a significantly expanded specialist program where we have specialists on a range of issues that come in and assist on AML, on fixed income issues, etc. So, it really is like planting the seeds. And over time, I think firms will see even more and more that the examiners and the risk monitoring analysts really understand their businesses.

13:14 - 13:28

Tom Nelli: 85% of the people selected what they were interested in. But when you look back into the system, that's where they had their expertise. So, it was a perfect match. It wasn't individuals just selecting things for something new.

13:29 - 13:58

Ornella Bergeron: We are really focusing on training. We focused a lot on training during 2020, identifying gaps and the gaps we needed to fill. So, we provided informal training and will continue to do that in 2021 to supplement everything that Tom and Bill mentioned. Because there are some, for example, and in my firm group, there's multiple business lines and there's a lot of new areas that some of the teams are being exposed to. So training is going to be a critical focus for us in 2021.

13:59 - 14:25

Tom Nelli: We created a training program that sits in the business, understands the business needs, our trainers come from the business. So, we have a deeper understanding of what the needs are of both our monitoring staff and our examiners. So, I think we've created a much more nimble ability to get out what folks need to be trained at a lot quicker in this new environment.

14:26 - 14:53

Kaitlyn Kiernan: That's great, and it makes sense that if people are already interested in the firm grouping, that they're going to be more curious, they're going to ask more questions and really want to learn and train and further their knowledge. So that's good to hear. And Bill, one of the big elephants in the room for 2020 was the implementation of Reg BI, Regulation Best Interest. As the head of the Retail firm grouping, can you tell us how that went?

14:54 - 17:00

Bill St. Louis: Sure Kaitlyn. I think the implementation of Reg BI really went well here at FINRA. In the run up to June 30th, which was the compliance date for Regulation Best Interest and Form CRS, we did a lot of work preparing our staff with training, identifying a team to come together to form a disposition group. That group is comprised of people from a number of disciplines at FINRA, and the purpose of that group is not only to assist the staff with questions they may have as they're doing examinations, but also to drive consistency in approach. I think consistency is always critically important when you're dealing with such a major new ruleset.

Before the compliance date, we did a number of things. We sent an email to firms with the word advisory in their title, reminding them of the disclosure obligation and the possibility that they might need to change their name. We did quite a bit of training. We prepared new examination content for the staff to help them address the various obligations in Regulation Best Interest, the four obligations, and Form CRS.

So the exams started in June and our staff did a good job on those examinations. And what we saw was mostly that in the initial six months of exams, many firms did employ good efforts in achieving compliance with Regulation Best Interest and Form CRS. Of course, there were some outliers, but we saw some good practices.

And also another thing that we did before Reg BI, and still to this day, is we communicated with the SEC primarily to make sure that we didn't duplicate efforts. We didn't want to arrive at a firm to do a Reg BI exam, only to see that the SEC had just left, having done a Reg BI exam. So, all in all I think the first six months of Reg BI have been good here for FINRA and from the exams in the firms that we've interacted with, generally, we've seen some compliant efforts.

17:01 - 17:07

Kaitlyn Kiernan: Can you share some best practices based on those early exams and maybe some common areas with room for improvement?

17:08 - 19:33

Bill St. Louis: It's a major new rule set and we expected to see both positive and areas where there could be improvements.

So, on the Form CRS front, we saw good practices with automated tracking that firms deployed to see that the Form had been delivered and where it had been delivered, to whom and when. We saw some good practices there.

On the BI front, we saw firms do a good job setting up committees to address conflicts and disclosures. Those committees had staff from compliance, supervisory staff, as well as risk management. We saw some really good efforts in training, especially positive given that no one saw the pandemic coming. So, firms were able to pivot to remote training. We saw some very good practices there. Layered training. Some firms offered a base foundation on BI and Form CRS and then supplemented it with specific training, sometimes aligned to the four obligations of Regulation Best Interest. Some firms use post-training tests that they required their staff to take after the training, and some firms even limited the staff from doing business until they passed those tests. So that was interesting.

And we also saw some firms redesign forms or processes to capture additional information, information like cost comparisons that could help supervisors and analysts review rollovers and account type recommendations.

Some of the concerns we saw, Form CRS has a question that says if you or your registered people have disciplinary history, yes or no, some firms got that question wrong. We saw deliveries to a household and not deliveries to specific accounts. And on the training side, we saw some inadequate training, late training or instances where supervisors didn't take training.

So, none of this is a surprise. It is a major new rule set. And like I said earlier, generally we saw some pretty good efforts.

19:17 - 19:25

Kaitlyn Kiernan: So, Tim, how did the 2020 exam program go from your perspective, in the Trading and Execution group?

19:25 - 20:17

Tim Thompson: Thanks, Kaitlyn. So, I think it was a really interesting year. This was the first time where the trading exam group within Trading and Execution really was embedded into the broader firm exam program. So, there was a lot of things to be learned. But I think overall it was a very successful implementation.

We used to have a group of somewhere around 170 people in Trading and Execution before the transformation that were largely operating their own exam program. There was still coordination with Member Supervision, but in 2020 those groups worked together, and the trading exam staff were embedded within the Member Supervision firm program. And I think overall it worked really well, better than I would have expected.

20:18 - 20:27

Kaitlyn Kiernan: So, does that mean if there was an exam, it would have examiners from both the appropriate firm grouping within Member Supervision and from T&E?

20:27 - 21:19

Tim Thompson: Yes, exactly. So, for example, in the past when the Member Supervision firm exam program was going to look at a firm, they would execute their risk reviews and they would do it without regard to what we separately might be doing with that firm. We might also even in fact, in the same year, do a trading exam of that firm.

And although in the past there might have been some coordination between those teams, it really was not in any way like it is today where those exam staff are actually made part of that larger firm exam program. So now instead of having potentially a firm exam and a separate trading exam, they would now have just one exam and the trading exam staff get moved over and work under that broader program.

21:20 - 21:27

Kaitlyn Kiernan: And then do firms also get the results from both exam staff at the same time in their final exam report?

21:28 - 22:29

Tim Thompson: So, the firm will get one exam report that incorporates both the firm exam piece from Member Supervision and the trading exam piece. There's always an exception to a lot of the stuff we do because the Trading and Execution group, the trading exam side of that, also does work on behalf of the RSA clients.

So, all of the stock exchanges basically have hired FINRA to do the work that they're statutorily required to do. So, when we do a trading exam on behalf of FINRA, we're often also doing some of that work on behalf of the RSA clients. And when we go to resolve that exam on behalf of our RSA clients, we have a separate process we have to work through with them. And so, we will have a separate report for those clients. But generally, both the trading and firm exams are all incorporated into one exam report, with the exception of those RSA client matters.

22:29 - 22:37

Kaitlyn Kiernan: You mentioned that you're working very closely with Member Supervision, but how does that organizational structure work?

22:38 - 23:36

Tim Thompson: So, T&E is separate in the fact that we report up through the management of Market Regulation. But to be honest, that's really on paper because as a matter of fact, we operate like one exam risk monitoring team. I have a dotted line to Bari Havlik who is the head of Member Supervision. I participate in her senior leader meetings and participate in all those decisions and discussions that occur there. The exam directors that report to me, Pete Stoehr and Kyle Morris, have a dotted line to Members Supervision.

So even though organizationally we report up through a different department, in reality it really works as one exam group and there's so much coordination. It's as if we're just all part of Member Supervision. I think in practice that's really the way it works and the way it was intended to work.

23:37 - 24:54

Kaitlyn Kiernan: Ornella, Bill mentioned earlier that there was coordination with the SEC around Reg BI, but just generally, how would you say that coordination has changed over the past year with firms, with other regulators and others within FINRA as a result of the Exam and Risk Monitoring Program transformation?

24:54 - 25:18

Ornella Bergeron: One priority of our transformation was improving coordination with firms which I believe has significantly improved with our unified Exam and Risk Monitoring Program. We historically had three separate programs, both for risk monitoring and examinations. We had a sales practice program, a FinOp program and a trading program which we combined into a single unified program which has really, really helped the coordination.

Creating the Single Point of Accountability that we spoke to quite a bit last year created one point for firms to escalate issues to that's the most senior person on the risk monitoring team that oversees the Risk Monitoring Program and also coordinates with the exam management staff on execution. And one of the responsibilities of the SPOA is making sure that they understand all the touch points to make sure that we're not duplicating efforts and that there is coordination.

Just in terms of coordination with the SEC and other regulators, there was lots of coordination throughout in 2020, for example with the volatility, the risk monitoring team was frequently meeting with the SEC as well as other regulators to share information related to the impact of volatility on firms. And in many cases, we joined forces and met with firms together in order to avoid duplicating efforts.

25:19 - 25:51

Kaitlyn Kiernan: Well, that's it for this first part of our two-part series on FINRA's Exam and Risk Monitoring Program. Bill, Tom, Tim, Ornella, thanks for joining me. All five of us will be back in two weeks with the second part focusing on how the program adapted in the face of the pandemic. And we'll look ahead to priorities and key areas of focus for the program in 2021. Listeners, if you don't already, make sure you subscribe wherever you listen to podcasts so you don't miss out on that update. Until next time.

25:51 – 25:56

Outro Music

25:56 - 26:24

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26:24 – 26:29

Music Fades Out

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