It’s not often that the SEC and FINRA share the podium at an industry event with senior officials offering up insights about effective compliance practices. But when they do – as with the July 14 biennial National Compliance Outreach Program for Broker-Dealers – attention must be paid. Here are key takeaways from the regulatory cops on the beat from this year’s version of the outreach event.
Exam tips
Speak up when you observe a lack of communication and coordination between FINRA and SEC examiners. FINRA EVP and co-head of member regulation Bill Wolman cited a recent case where FINRA had narrowed its exam of a large firm after it had already been examined by the SEC. But it turned out an SEC regional office had already focused on the same narrow area.
“We had asked the CCO to let us know what other exams had been completed,” Wolman said. “We were not alerted to that until halfway through,” he noted.
Other exam advice from Wolman:
- Use Request Manager. You can utilize FINRA’s online document tracking system as an audit tool. Requests and firm submissions are dated, and modified as needed. The system also shows when submitted documents were not reviewed.
“We can run exception reports – and we are starting to – to make sure we are not asking for things unnecessarily,” Wolman said.
- At the outset of an exam, ask to be introduced to the exam managers. You likely will need to talk with them later. “It really does us no good,” Wolman said, “if we are going down the wrong path or asking for the wrong documents.”
- Don’t treat interviews like depositions. “It will be much quicker and less painful if we have a good open dialogue,” Wolman said.
Outside business activities
Direct-away accounts are “a subject near and dear to my heart,” said Dan Gregus, associate director of the SEC’s Chicago regional office. They can be a source of funds for reps in remote offices to engage in private activities and firm systems are often unable to track or detect them.
Identifying high-risk brokers
A “very high risk situation” that Gregus said the agency has “come across more than once” is a rep selling a product that is outside his firm’s normal expertise and is the only rep at the firm selling the product. “We have seen this both with complex products but also in the muni area,” Gregus said, adding that the problem turns up especially in remote offices where the rep is also a supervisor.
SARs monitoring and reporting
Anti-money laundering is another exam focus area for the regulators. Sarah Green, a senior director in FINRA’s enforcement division, said examiners are looking for answers to these eight questions during an AML exam:
- Is the monitoring system – automated or via exception reports – appropriate for the risks of your business?
- Is the firm adequately responding to and investigating the alerts?
- Is there proper staffing?
- Are SARs filed on a timely basis?
- Are reasons for not filing SARs adequately documented?
- Are your systems capturing suspicious trading as well as asset movements?
- Are you relying on others to monitor and escalate?
- Is that reliance reasonable?
FinCen rules
FinCEN is putting finishing touches on enhanced customer due diligence rules that would require firms to identify and verify beneficial owners of accounts. Green said the rules will be “a real game changer for our industry” but also “a really important tool for us to fight financial crime.” There are exemptions for trust accounts and some others, but you should get ready to develop extensive new tracking systems.
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