FINRA Examination Program

FINRA Examination Program

October 9, 2012

1:00-2:30 Eastern Time (ET)

2 FINRA Examination Program Webinar Copyright 2012 FINRA

Agenda

1. Risk Based Exams

2. Preparing for Exams

3. Common Exam Findings

4. Industry Tools and Practices


Program Notes

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Use of the practices and information from this program does not

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harbor from regulatory responsibilities.

Risk Based Exams


Risk Based Exams

Overview

Criteria Used to Determine Risk

Exam Prioritization

Future Exam Program Changes


Risk Analysis

Delivering risk intelligence to Regulatory Operations

The strategy of the Risk Office rests on our ability to prioritize potential exposures, align appropriate

risk measurement tools and methods, and rollout risk intelligence in relatively short order. The time

from model inception to delivery is typically measured in days or weeks, which is significantly shorter

than the typical regulatory or business intelligence lifecycle. As such we rely on an ability to:

Process, aggregate, and analyze large quantities of data quickly;

Bind that data to other, disparate data sets to transform raw data into information;

Rapidly process that information into value added analytics; and,

Render that analysis in a form that is both digestible and filters out the noise.

Applying industry

leading risk

measurement tools,

methods and

approaches to the

regulatory challenge –

and impacting our

regulatory programs

Built an integrated

risk architecture to

deliver robust

analytics


Delivering Value to Regulatory Operations

How we’re influencing Regulatory Operations

Business Model Segmentation and Controls Assessment Qualitative risk analytics that facilitates the segmentation of firms.

Helps to identify the risks associated with firms and attendant controls.

Transactional and Portfolio Level Risks Analytics Assesses the transactions firms engage in looking at individual buys

and sells at the CUSIP instrument level.

Leverages modern portfolio analytics and industry leading risk drivers to identify accounts (customer or house) with outsized risk positions.

Risk Based Planning and Periodic Risk Assessments Prioritizes firms for examination (Sales Practice, Market Regulation

TMMS, and Municipal Securities) based on the nature and materiality of their business, the risks they represent, and alignment to our overall priorities.

Agility to focus regulatory programs on priorities in a changing environment and provide the most up to date information available at a branch, firm or segment level.


Risk Control Assessment

Gaining a better understanding of business models, attendant risks and underlying controls

The Risk Control Assessment (RCA) is a survey that was distributed across the membership with an

intent to increase our understanding of the business model, attendant risks and underlying controls

associated with each member firm. The purpose of this information is to gain greater transparency

into:

• The products and services they sell;

• The clients and counterparties they deal with; and

• The markets they operate in.

• Input from small to large member firms

• Included representation from the Sales and Trading, Risk, Finance, Operations and Compliance; and,

• Mid-stream adjustments to the RCA were made based on feedback from early responders and the SFAB.

Exam Focus and Preparation Tips


Exam Focus and Preparation Tips

Branch Exams

Tips

Exam Close

Common Exam Findings


Common Exam Findings – Summary

Inadequate Supervisory Systems / Procedures

AML Compliance Issues

Suitability of Recommendations

Failure to Evidence Supervisory Review of Recommendations

Failure to Conduct Adequate Branch Inspections

Selling Away / Outside Business Activities

Advertising and Sales Literature Concerns

Undisclosed Email Accounts - Supervision of Electronic

Communications

Industry Tools and Practices


Industry Tools and Practices

Outside Business Activities (OBAs)

Suitability


Industry Tools and Practices – OBAs

Common Exam Findings

Industry Tips

Resources

2012 Free FINRA Annual Conference On-demand Session


Industry Tools and Practices – Suitability

Preliminary Findings

Limited results so far – early in process.

Generally, examiners find compliance.

Some firms in various stages of implementation.

Firms have incorporated KYC requirements into their information

gathering tools.

Several instances where firms did not implement procedures to

comply with the rules exemptive provisions.

Small number of firms – no effort whatsoever to comply.


Industry Tools and Practices – Suitability

Industry Tips

Resources

Access to Free Online Learning:

– Suitability and Know Your Customer Webinar;

– 2012 FINRA Annual Conference On-demand Session; and

– 3 Part Suitability Podcast Series

Regulatory Notice 12-25

Send feedback to: [email protected]

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Documents

FINRA Examination Program