What FINRA’s Investor Protection Efforts Will Mean for Broker-Dealers and Reps in 2012

On December 16, Financial Industry Regulatory Authority (FINRA)  issued a Press Release highlighting its regulatory accomplishments during 2011.  FINRA makes clear its goal is two-fold:  protecting investors and bringing transparency to financial markets.  The release demonstrates for senior management, risk management and compliance managers the additional arsenal FINRA is employing to beef up its oversight of broker-dealers and their registered reps.  So far, for reps and their firms, this has meant a significant increase in the number of disciplinary actions this year.  The release identifies  some of the newer tools and sources FINRA has used and will continue to employ to protect investors.

What’s been different about 2011 and what will firms and reps experience more of in 2012?  The press release sheds light on some measures FINRA will be employing, including:

  • Using its Office of Fraud Detection and Market Intelligence (OFDMI) to refer matters involving potential fraudulent conduct to federal and state regulators and law enforcement agencies.  FINRA referred more than 600 matters this year.
  • Reconfiguring its exam program to be more risk-based and ensuring exam teams are more focused on those areas critical to investor safety; including identifying high-risk firms, branch offices, brokers, activities and products through broader data collection.
  • Developing, through its Market Regulation Department, cross-market surveillance patterns that monitors all FINRA, NYSE and NASDAQ markets (80 percent of equity markets) with plans to launch these patterns in 2012.  Earlier, FINRA expanded the Order Audit Trail System (OATS) to include all NMS securities to create a uniform order audit trail to serve as a foundation for the cross-market surveillance program.
  • Expanding the Trade Reporting and Compliance Engine (TRACE) to include securitized products.  The effect was to add more than 1.2 million asset- and mortgaged-backed securities to the current 70,000 TRACE-eligible securities; and introduced securitized products benchmark pricing and aggregated data reports on FINRA’s website.
  • Continuing to push rule proposals that include Back Office Registration, Suitability and Debt Research Conflicts of Interest.
  • Enhancing its examination program by taking a more risk-based approach to focus on areas posing greatest risk to investors.  With this, FINRA has increased the number of its staff in district offices responsible for having a deeper understanding of specific firms, including increased real-time monitoring of business and financial changes.
  • Placing greater emphasis on branch-level activity by increasing the number of branch exams that focus exams at the point-of-sale.
  • For 2012, developing comprehensive cross-market surveillance patterns that will examine trading activity across all markets, including FINRA, NYSE and NASDAQ equity markets, at one time (which account for 80 percent of equity volumee time), rather than having multiple patterns survey each market separately.  This is suppose to help FINRA identify problematic trading more quickly.
  • Finally, FINRA implemented a rule for firms and reps involved in FINRA arbitrations allowing investors to choose all-public panels in customer cases involving three arbitrators.