FINRA Chairman and CEO Richard 'Rick' Ketchum spoke about hot-button issues at FINRA, including changes to its exam program and improvements in firm compliance practices - at today's FINRA Annual Conference in Washington, D.C. 

    FINRA Exam Program.  In the last year, FINRA's added 20 more coordinators to its district staff, for a total of 90 district staff dedicated to the surveillance function.  FINRA seeks a much more in-depth understanding of member firms' businesses and the areas that pose the most risk - e.g., FINRA's using both paper and electronic means to verify that customer assets exist and are being held on behalf of customers in secure locations. 

To get more granularity in the financial data it receives from firms, a rule was proposed that would allow FINRA to collect supplementary information to the FOCUS report.  A supplementary income statement schedule would offer a more informed understanding of the drivers of each firm's business.

FINRA examiners will devote more time to understanding risks and how well they are managed or mitigated - placed greater emphasis on open-ended thematic reviews that require a more complete understanding of a firm's business and areas that are vulnerable to breakdowns in controls.

Branch-level activity will get more attention - meaning more branch exams - so as to refocus exams at point-of-sale.  During 2011, the examiners also plan to spend more time on site at the Branches and, depending on the firm, less time at the main office.  This is because we believe that the point of sale and interface is where we have historically found troubling conduct occurring, and we want to better target our resources.

    Compliance Trends at Firms. First, firms are applying more due diligence to the hiring process when it comes to RR's - firm are avoiding RR's with significant disclosures or complaints;  firms are expanding the use of background and disciplinary checks through the CRD and BrokerCheck. 

Many larger firms have improved their monitoring of market and credit risk - paying more attention to the size of their balance sheet, as well as to the quality of the assets on the balance sheet, and leverage levels.  More rigorous stress testing and enhanced communication between market and credit risk teams and the treasury function are in evidence.  More investment banks are maintaining excess liquidity pools at the broker-dealer, rather than the holding company, thus comforting the regulators that the banks will be able to withstand the next market shock.

Firms are employing more sophisticated exception reports that combine a wide array of red flags and scenarios.

• e.g. - seen several firms have implemented electronic tracing programs to track changes to customer's private information.  The programs allow the firm to use an electronic signature to trace who changes that information.  The programs provide alerts and exception reports if customer information is changed, removed or downloaded to a disc or thumb drive. 

Firms also are using off-the-shelf software to track customer account activity, profit and loss, cost-equity, et cetera, and combine the different numbers into risk scenarios.  Each risk scenario is scored and appropriate action is prescribed for each score range.

Other firms are using reports designed to monitor potential discretionary trading without authorization and/or unauthorized trading - i.e., tracking multiple orders by the same RR in the same security, and then comparing the orders to telephone records, in order to review for customer contact.

A number of firms now are identifying lifecycle events and putting heightened monitoring programs in place to review the activity.

Email surveillance has improved, with firms implementing more enhanced email review capability to help them conduct more precise and targeted email reviews.

Finally, firms are improving their self-reporting - e.g., when firms' controls are compromised, they're telling FINRA.  FINRA also is finding that when its examiners are investigating firms, management often provide additional information that's unrelated to the investigation. 

• In 2 recent enforcement matters, firms were given significant credit for cooperation:  (i) a firm that self-reported a delivery failure that dwarfed the matter then under review by staff;  (ii) a firm voluntarily undertook a broad-ranging internal review-of-order issue, which saved FINRA staff hundreds of hours of investigative time and eliminated the need for a dozen on-the-record interviews.

To access the text of Mr. Ketchum's Speech, go to:   [FINRA Speeches, 5/24/11]