Skip to main content


Exam and Risk Monitoring Program: Responding to COVID-19 and Looking Ahead

April 06, 2021

Last year, as FINRA staff looked to adjust to a new exam and risk monitoring program structure, the industry and the world was struck with an unprecedented global crisis.

On this episode, the second 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 FINRA adjusted its Exam and Risk Monitoring program in the face of a global pandemic. Then, we turn to the current year to talk about the new 2021 Report on FINRA’s Examination and Risk Monitoring Program and discuss insights on recent exam findings and priorities for the year ahead.  

Resources mentioned in this episode:

Episode 79: Year in Review: The 2020 Exam and Risk Monitoring Program

Episode 71: Overlapping Risks, Part 1: Anti-Money Laundering and Cybersecurity

2021 Report on FINRA’s Examination and Risk Monitoring Program

COVID-19 Resource Page

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 – 00:25

Kaitlyn Kiernan: Last year, as FINRA staff looked to adjust to a new Exam and Risk Monitoring program structure, the industry and the world was struck with an unprecedented global crisis.

On this episode, the second in a two part series, we hear from four leaders about how FINRA adjusted its Exam and Risk Monitoring program in the face of a pandemic before turning to the current year to hear what's in focus for 2021.

00:25 – 00:35

Intro Music

00:35 - 01:47

Kaitlyn Kiernan: Welcome to FINRA Unscripted. I'm your host, Kaitlyn Kiernan. Today, we are welcoming back to the show four leaders from FINRA's Exam and Risk Monitoring program for the second part of a two-part series on the 2020 and the 2021 exam programs.

Today, we are welcoming back Ornella Bergeron, senior vice president of the Carrying, Clearing and Diversified firm groups. Bill St. Louis, senior vice president of the Retail and Capital Markets firm groups. Tim Thompson, senior vice president of the Trading and Execution firm group. And Tom Nelli, senior vice president in charge of executing exams, setting standards across the firm groupings and quality assurance testing. Tim, Tom, Bill and Ornella - welcome back.

On our last episode, we talked about how the 2020 exam program went in light of a major transformation of Member Supervision's organizational structure around firm business models. On this episode, I want to turn to how the program went in light of the impacts of the COVID-19 pandemic and then to look ahead to priorities for 2021.

To kick things off, Tom, thinking back to last March, what happened? Can you give us a play by play of how Member Supervision reacted?

01:47 - 04:40

Tom Nelli: One week, we were all in the office, working, getting ready to conduct our exams. It was a new year. It was a new way of doing the exams because of the transformation. And the next week we were all working remotely. I will take a moment to compliment our I.T. department because we went remote seamlessly. It was really impressive. Everyone was up and running. We were told the week before that Monday will be working from home remotely until further notice. And Monday everyone was up and running.

That didn't mean there weren't challenges. New people in different seats. A lot of people had to get to know each other and now we're remote. But that really worked out well. And I think it kind of forced us to stay closer to each other, because we were remote and we consciously knew that we're not seeing each other in the offices, even though, quite honestly, we were geographically agnostic. Most of your peers weren't in your office anyway, but it did make us stay closer to each other and communicate more with a lot of Zooms.

But what we did have to recognize was the rest of the industry was going remote and that transition may not have been as smooth as it was at FINRA. And we had to stop and let firms catch up with the changes that were taking place. Some firms were able to do it a lot faster than others. Also, there was a lot of market volatility, systems at these firms were not operating the way they thought they would, plus the working remote.

So, we in the exam program put a pause on the program for a couple of weeks so they could catch up, get their systems operating, get people settled, remote working. And then we started up the program. But even when we started up the program again, after giving them some time to catch up, we understood new policies of how to get documents when you're not in the office, all of that was the issues that firms had to deal with. So even after we commenced the exams, we gave them a little extra time, if they needed it, to work out how to get us the documentation.

So, there was challenges, of course, because examiners are thinking things will take a certain amount of time. Last year was a learning of people are going to need more time and they're going to need to work these things out as they're learning how to deal with their problems at their firms. I would say every month it got better and better. Firms really started locking in on how to get things operating. And I think from there on in, we hit the road running. But I will say at the beginning there was some challenges.

04:40 - 04:49

Kaitlyn Kiernan: Ornella, the relationships between the firms and the risk monitoring analysts were brand new. How do you think the pandemic impacted those relationships?

04:50 - 06:38

Ornella Bergeron: Before getting to the relationships, just to give a little background, we had just transitioned to a new structure and new managers and then sort of COVID hit and the risk monitoring team really had to re-prioritize their work and focus on monitoring the impact of the market volatility as a result of the pandemic. So risk monitoring teams were monitoring the financial operational impacts on firms, including transitioning to BCP plans and working remotely, the impact that the volatility was having on the firm in terms of liquidity, market risk, credit risk, net capital, and they were proactively reaching out to firms, sometimes daily. And there was a lot of heightened monitoring of firms which require more frequent reporting of information.

Throughout the market volatility there was a lot of interaction with the SEC and other regulators, clearing organizations, the states, to share information related to the impact to firms. And our staff does continue to reach out to their firms regularly to stay abreast of any new developments or challenges that COVID-19 brings, as well as the other market volatility that we're seeing related to other events in the market.

So, in terms of the relationships, I think that was one of the silver linings that came out of this. We knew the RMAs were building new relationships with firms but going through what we did in 2020 and the additional interaction, the additional communication, really did accelerate the working relationship with the firms. And our staffs were able to get to know their firms better, as well as get to know their businesses much quicker, in my view, than they would have otherwise.

06:39 - 06:47

Kaitlyn Kiernan: And Bill, how do you think the experience has generally changed the firm-risk monitoring analyst relationship?

06:47 - 08:30

Bill St. Louis: I agree 100 percent with Ornella, I think it has made the relationship stronger. The risk monitors play an important regulatory function. Their job is really to understand their firms and through that understanding, help tailor exams so that the exams are truly risk based exams. So they want to identify risks, they want to understand the risks, and they want to work with the exam staff come up with ways to address the risks that have been identified.

While they play that important regulatory role, they are also a resource for their member firms. So the more frequent communication through the pandemic, through all of the market volatility, I think, has shown firms that if they have a question at FINRA, they can reach out to their risk monitoring staff who can get them an answer or help facilitate a conversation with the right people with FINRA who can answer the question.

There was a lot of emphasis and focus at the beginning of the pandemic around rule interpretations and rule relief and navigating rules. And FINRA not only established a webpage to house all of that information, but risk monitoring, escalating questions and issues to OGC, I think anyone who looks back on what FINRA did during the pandemic would agree that it was a lot of clarity and transparency and assistance provided around rules and rule application, etc. during the pandemic. So overall, I think obviously unfortunate, but really facilitated this new model that we have and the new relationships that we have with our firms.

08:31 - 08:42

Kaitlyn Kiernan: Tom, what was happening with the exam program as the risk monitoring analysts were working more closely with firms to prioritize and assess the situation?

08:43 - 09:48

Tom Nelli: So, I think one of the benefits of the transformation was that risk monitoring was set up in groupings that allowed us to get real time information about what firms were going through early on in the pandemic. It was literally real time. The next morning there would be information from the risk monitoring groups what was going on in their groupings. This was fed to the examiners and they were able to determine, is this the time to ask for another document while we know this is going on in this grouping?

And so, we were able to adapt our program based on the real time information we were receiving from the risk monitoring group. And that was extremely, extremely useful because firms really appreciated not only did the risk monitoring group understand their business, but examiners had that information and were adapting their procedures around that. I think they felt like we understood what they were going through, and we were working with them.

09:49 - 10:02

Kaitlyn Kiernan: And of course, exams typically have an in-person element to them, but with travel restrictions and obviously the firms being remote as well, how did the exam program change and adapt to those restrictions?

10:03 - 11:10

Tom Nelli: Obviously we couldn't go on site for several reasons. One, cities were closed down. Firms were not in their offices. Going to an office when no one's there would not make sense. So, we did have to adapt.

We added additional buttons in our system that if we think at a later date we need to visit a location, we have that documented. But we did adapt. We managed to collect additional documentation that maybe you would have looked at onsite, asked additional questions or had additional interviews to substitute for the onsite.

But all in all, I think it extremely well. And the feedback is we don't feel like we missed a lot by not going onsite. We feel like all of our exams, we got to the information we needed to get through, asking for additional documentation, we'll have an additional interviews with managers and/or registered reps to understand fully what's going on so we can make an assessment with the information we collected.

11:10 - 11:14

Kaitlyn Kiernan: Given that success, do you see any of these changes potentially sticking around?

11:14 - 11:33

Tom Nelli: I see us having more flexibility and being more creative in the exam process. I feel like it has demonstrated to us that there's several ways to accomplish an excellent exam. And I think it's just another tool in our toolbox that we could use going forward.

11:34 - 11:42

Kaitlyn Kiernan: And so how many exams were actually completed in 2020, and how does that compare to FINRA's initial goal for the year?

11:43 - 12:34

Tom Nelli: We had a specific schedule on exams and like every year before, we are on target to complete it. While there's some spillover, absolutely. We have that every year because we find additional things we got to investigate, which may put us into the next year. On all in all, this year has been no different than any other year. We had a specific schedule, we followed it and there are some carryover, but that's normal carryover you get when you start looking into a firm, when you find items that you got to look deeper into and you need a little more time to do it. So while it was a challenge and we did have delays, I don't think if I look year over year that it really affected our schedule more than any other years.

12:35 - 12:52

Kaitlyn Kiernan: That's very impressive. Bill, just to wrap up our conversation of 2020 and the impacts of COVID-19, do you think FINRA's experience with COVID-19 will change the way the risk monitoring team looks at or evaluates risk going forward?

12:52 - 13:59

Bill St. Louis: I certainly do. I think just as folks are going to digest what they learned from the pandemic, we too are looking at what we've learned from the pandemic. I think we're going to be more attuned to how disruptions impact firm operations, firm finances. And a clear example of some of what we've already learned being put into play, we've developed an internal playbook, as it were, for how to address geographic disruption.

So the storms in Texas, the disruption in Texas, for example, we utilized some of what we've learned from the pandemic in risk monitoring to interface with our firms that were impacted by the Texas storms, reach out to firms, prompting them with certain questions that we learned from the pandemic that they might be facing during the disruptions from the storm, that sort of approach. So, I think with time that playbook will be refined and be ready for use in future events.

14:26 - 14:21

Kaitlyn Kiernan: So, shifting gears to the current year, in 2021 FINRA is doing something a little different. We released in the past an Annual Priorities Letter and also an Exam Findings Report, but those have been combined into one document called the Report on FINRA's Examination and Risk Monitoring Program. So, Ornella, why the change here?

14:22 - 15:32

Ornella Bergeron: So, Kaitlyn, it was really a matter of looking at trying to improve what we do in terms of the publications we put out. We really thought it would be much more beneficial to provide our firms with just one document that highlights what we're seeing, what we're starting to see, from our examination programs and also provide guidance on topics where firms may want to focus more their attention on. We do hope that firms find it easier to navigate through and also to evaluate and improve their programs based on the report. But obviously we welcome any feedback from anyone that has feedback, good or bad.

But the report does cover some new areas of focus. But many of the areas that are addressed in the report really represent ongoing core compliance responsibilities that are relevant to many of the firms that we examine. But we do have a risk-based program, so the scope of an examination will really depend on the specific risks that relate to each of the firms. So not everything in the report is going to be examined at every firm. It'll be firm specific

15:33 - 15:44

Kaitlyn Kiernan: Bill, on the retail side of things, the new report has a section on Regulation Best Interest and Form CRS. What did the report have to say on this nine months in and what's in focus?

15:44 - 16:26

Bill St. Louis: We'll still be focused on looking at firm implementation efforts. But our examinations are always backwards-looking as a review period and as we do exams in 2021 and beyond that cover more of a post-June 30th time period, we can anticipate that there'll be some deeper reviews, there'll be more reviews of recommendations because there'll be more recommendations to customers where Reg BI applies as the review period moves forward. So, focus on implementation, deeper reviews and more reviews of recommendations and conflicts and disclosures.

16:27 - 16:36

Kaitlyn Kiernan: So, beyond Reg BI, does the report have any other priorities worth mentioning for Retail or the other firm grouping you work with, Capital Markets?

16:37 - 19:02

Bill St. Louis: Well, I always encourage the industry to pay close attention to reports like that one. I think they are a must read for compliance and risk and supervisory staff. And there are a number of different priority areas in there that are relevant to Retail and Capital Markets firms. I'll just touch on two very briefly.

One, I just want to remind everyone that there's an intersection between cyber events and AML. So, account intrusions, takeovers, data breaches likely will be SAR reportable. So, I just wanted to remind firms of that. And that's something that we pay quite a bit of attention to.

On tech governance, there are a number of firms that have platform outages in 2020, some of which related to market volatility. And the headline on outages, and like a lot of things on tech governance, is testing, testing, testing, capacity testing, vendor management, ongoing maintenance and testing of changes, new patches, scripts, new software, new hardware. Testing to see whether or not the linkages between systems are going to operate as expected when there are patches or changes to one part of the system.

And then the other thing about outages is we're very focused on customer service during outages. Can firms handle the incoming calls from customers? Are there ways for customers to access and make transactions through other entry points if, for example, an app is down?

And then finally, communications is another area that's covered in the report. I'll just touch on communications regarding digital assets. Are risks being disclosed? Liquidity, other risks related to digital assets? If a firm has part of its digital asset business being facilitated through affiliates that are not member firms, are the communications around that clear or is the firm perhaps implying that it's all happening at a FINRA-registered and regulated firm, when in fact it's not?

So, the report is a must read and there's a lot in there that's relevant to Capital Markets and Retail firms as well as firms in the other firm groupings.

19:03 - 19:25

Kaitlyn Kiernan: And I will remind listeners that we did have an episode with the Member Supervision specialist teams from AML and Cyber, Episode 71. So also, a good place to go for some information on those overlapping risks. Ornella, are there any exam findings or priorities to highlight from the report related to Carrying and Clearing or the Diversified firm groups?

19:26 - 20:16

Ornella Bergeron: Many of the highlights that Bill provided also apply to the Carrying Clearing and the Diversified firms. Cybersecurity outages, communications, all areas that will be important to review at the firms in my groupings.

In addition, though, I also would want to mention that given the market volatility that we've seen and the impact that the market volatility had on many of the firms in my groupings, it's going to be important, and not only my groups, but other groups as well. It's really going to be important for us to continue to focus on the financial management and operational areas that are included in the liquidity risk management, net capital, credit risk management, also mentioned BCP, cybersecurity as well as tech governance, among other areas that are in the letter.

20:17 - 20:24

Kaitlyn Kiernan: Tim, what's in focus for Trading and Execution this year in terms of priorities?

20:24 - 22:11

Tim Thompson: in 2021, we're going to continue to look at the implementation of the Consolidated Audit Trail. So, the Quality of Markets program and Market Reg has surveillances and they are closely monitoring this new audit trail that was mandated by the SEC and that began to be implemented last year.

On the exam side, when we do a trading exam of a firm, we will look at their written supervisory procedures and we will look to ensure that they are taking all the steps necessary to meet the obligations that are imposed by this new rule that implemented the Consolidated Audit Trail or CAT. So, in 2021, that is again going to be a big focus of ours.

We also will continue to look at best execution, which we've been doing, and it's been a priority of ours for the last few years. Related to that, we will be looking at the role of wholesale market makers in executing and handling orders that are routed to them from retail firms. It's not uncommon for a retail firm to route their orders to a market making firm to handle and execute those orders. And typically, when that happens, that wholesale market making firm will make a payment or use payment for flow to induce the routing of those orders to that firm. So, payment for order flow, of course, is permissible. But we want to take a look to make sure that the wholesale firms are meeting all their obligations under the role for handling those orders. So that will continue to be a focus of ours as well.

22:13 - 22:16

Kaitlyn Kiernan: So that's included as part of the best execution review?

22:16 - 22:23

Tim Thompson: Correct, I would say it's related to those best execution reviews that we are undertaking.

22:24 - 22:31

Kaitlyn Kiernan: And are there any key takeaways from the 2020 exam program that you think are relevant for firms to know this year?

22:32 - 23:33

Tim Thompson: It was really last year that we started looking at the Consolidated Audit Trail because that's really when those rules went into effect for firm reporting. And it's early. We're just finishing exams from 2020. But there have been some preliminary findings where we think some firms could do a better job and put in place a written supervisory procedures to regulate their compliance with the Consolidated Audit Trail rule.

But I would say overall, one thing that I take away from 2020 is that hopefully firms will see that this coordination between the trading exam group and the larger member firm program makes the process of dealing with FINRA and dealing with exams a little easier because you're dealing with one group and it's more coordinated in the way that we're reaching out to firms and hopefully the firms are seeing that on their side as well.

23:34 - 23:45

Kaitlyn Kiernan: Tom, just to wrap up here, are there any big ways you see the Exam and Risk Monitoring program changing in the year ahead, or do you think the biggest changes are behind us? 

23:46 - 24:41

Tom Nelli: If we change it to years ahead, one of our big emphasis is on advanced analytics, and I think that's all of FINRA. We get a lot of data; how do we process it the most efficiently? How do we coordinate all the data that we already have so that we can identify the true risks that firms may have and get that information out to them as quickly as possible? Because we are a data hub, we get a lot of information. And not only should we use that to identify risks, we should also use it to help firms understand what we're seeing in the industry.

So, I think our biggest change over the coming years is the use of data and advanced analytics to get this information to them before it actually becomes an issue for them. If it is a true risk, we should be identifying it and telling them what we're seeing. So, I think that's our biggest change going forward.

24:43 - 25:19

Kaitlyn Kiernan: Great, and we did have a podcast with Member Supervision's head of data analytics, Kerry Gendron, Episode 68, so good episode to listen for more on that. That's it for the second part of our series on the Exam and Risk Monitoring program. Bill, Ornella, Tim and Tom, thanks so much for joining me once again.

Listeners, if you don't already, make sure you subscribe to FINRA Unscripted on Apple Podcast, iHeartRadio, Amazon podcast, or wherever you listen to podcasts. If you have ideas for future episodes, you can email us at [email protected]. Until next time.

25:19 – 25:25

Outro Music

25:25 - 25:53

Disclaimer: Please note FINRA podcasts are the sole property of FINRA and the information provided is for informational and educational purposes only. The content of the podcast does not constitute any rule amendment or interpretation to such rules. Compliance with any recommended conduct presented does not mean that a firm or person has complied with the full extent of their obligations under FINRA rules, the rules of any other SRO or securities laws. This podcast is provided as is. FINRA and its affiliates are not responsible for any human or mechanical errors or omissions. Parties may not reproduce these podcasts in any form without the express written consent of FINRA.

25:53 – 25:58

Music Fades Out

Find us: X / Facebook / LinkedIn / E-mail

Subscribe to our show on Apple Podcasts, Google Play and by RSS.