FINRA’s Member Firm Examination Process

FINRA Examination Process

Updates to FINRA’s member firm examination process

FINRA examiners have the difficult task of reviewing member firms and assessing risk. This association regulates more than 3,700 brokerages and 630,000 registered representatives in total. In order to help improve their member firm examination process, FINRA announced a self-evaluation and organizational improvement initiative named FINRA360 in October of 2017. By consolidating its financial compliance and business conduct program, the organization is taking a big step forward in improving its examination process. In light of the changes made to support this new initiative, firms can now expect greater transparency and consistency regarding how FINRA assesses risk.

FINRA President and CEO Robert W. Cook attests to these efforts, stating, “After careful consideration and extensive feedback from internal and external stakeholders, we are moving toward a program structure that is based on the firms we oversee. By directing our expertise and resources in a more tailored way, we will become more effective at examining for compliance.”

Specifically, FINRA’s efforts to improve the examination process also helps firms better understand the process in the context of their firm’s particular risk. FINRA’s efforts to become a more risk-focused regulator with a unified training program helps member firms place higher faith in the overall examination process.

Consolidation and hierarchy restructuring

During regular exams, FINRA applies a risk-based approach and focuses on aspects of each firm where there is heightened regulatory risk, in addition to certain core areas of the business. Furthermore, FINRA investigates allegations of customer harm against the firm or its representatives.

FINRA examinations are nontransferable, and firms are likely to remain under the tutelage of their locally assigned office. Younger examiners may be more aggressive when interpreting exams, while others may be more lenient. FINRA examiners come in a variety of ages, backgrounds and experience; yet regardless of normalization, each examiner at FINRA’s 14 separate offices has their own undeniable particularities.

The FINRA360 effort has helped to mitigate variances between district offices by creating a unified and simplified approach to evaluating member firms. FINRA has shifted its focus toward enhancing examiner training and incorporating feedback from member firms to improve consistency between examiners. The regulatory authority is also building a training program for new examiners and working to improve existing examiners’ understanding of different business models and risks.

Consolidation efforts have also unified the three programs responsible for business conduct, financial conduct, and trading compliance to help align examination resources. Consolidating these three programs increases the effectiveness of exams by reducing their length and creating greater consistency and better assessment of how firms are targeted based on the risks they present.

FINRA has also focused on restructuring their hierarchy to create a stronger, stricter and more coherent appeals process that highlights consistent delegation to higher-level officials within the organization. By unifying firm examination programs, FINRA has created a single point of accountability to better customize examinations, which affords FINRA examiners more leverage in considering the unique complexity of each member firm.

Exam process improvement

In addition to staff training improvements, FINRA has also focused on making improvements to the examination program, including:

  • Tailoring its approach to examinations by trying to better match the business model, activities and relative risk of the examined firm.
  • Continuing firm examinations every four years, and examining higher-risk firms based on their particular risk assessment.
  • Strengthening FINRA’s risk-monitoring program to include better regulatory responses, such as cause and sweep examinations.
  • Incorporating process improvements that avoid overlapping exams and ensure that appropriate scope is applied.
  • Leveraging technology and facilitating more off-site work to ensure that on-site examinations are more focused.
  • Analyzing a firm’s potential risks before arriving on-site to help improve exam efficiency.
  • Ensuring consistency across Regulatory Service Agreements (RSAs) exams with exchange clients by assigning a specialized unit housed in FINRA’s Market Regulation Department.

FINRA’s efforts to enhance and improve the exam framework focus on creating exams that are risk-based. FINRA is moving the exam process away from designating firms as simply a one through four-year cycle firm and is instead focusing on each unique firm and re-examining needs based on more frequent risk assessments.

With these rules have continued to improve member firm oversight and help unify business conduct and financial compliance exam programs. The FINRA360 initiative continues to work to eliminate program gaps and streamline the examination process to ensure that the examinations of individual firms are void of duplication or gaps. Through FINRA360’s program consolidation and exam process improvement, member firms can expect examinations to follow a more cohesive, consistent, educated and reliable process.