Reuters: Regulatory News: COMPLY-Straight talk with regulators can ease pain of exams

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COMPLY-Straight talk with regulators can ease pain of exams Apr 27th 2012, 17:29 By Suzanne Barlyn April 27 | Fri Apr 27, 2012 1:29pm EDT April 27 (Reuters) - Playing host to regulatory examiners while they sift through documents for weeks is not a role that brokerages typically relish. One U.S. regulator says she has a solution for brokerage compliance professionals that would help examiners run more focused exams and not stick around longer than necessary: educate them. Engaging in a little straight talk with examiners at the start of an exam, or even before, can prevent unnecessary confusion and questions, said Susan Axelrod, who heads the Financial Industry Regulatory Authority's member regulation sales practice area. While that may sound obvious, brokerages often hesitate to talk to regulators. And that's the wrong approach, Axelrod said. The timely advice comes as brokerage compliance professionals are guiding their firms through a period of regulatory flux. Compliance departments are bracing for changes required by a new FINRA rule that takes effect in July. It requires brokerages to ensure that investments are suitable for clients at all times, not just during the sale. As brokerages prepare to comply with the rule and for related exams that will follow, they are also dealing with another shift in the works: a recent approach to exams at FINRA that focuses on ferreting out the riskiest firms. Those companies may include a high number of brokers with disciplinary records or companies that repeatedly fall below the required amount of liquid assets. The more information that FINRA can analyze ahead of time, such as data about transactions, the more targeted and efficient exams brokerages can expect, Axelrod said. An open dialogue between brokerages and the regulator, Axelrod said, is a key component to achieving that goal. Here's her best advice: EXPLAIN YOURSELF Have a discussion with FINRA about changes in place at the brokerage to comply with its new suitability rule. It could prevent rounds of unnecessary questions when examination time finally rolls around. The rule requires investments to be suitable for clients at all times, as circumstances change in their lives. That means making sure investments are suitable even when clients are holding a security for the long haul. That has led to sweeping changes at brokerages, affecting everything from discussions between brokers and customers, to adopting technology that will monitor clients' portfolios. Most firms are putting the finishing touches on their new programs. Soon, brokerages will need to answer to examiners about complying with the rule. Compliance professionals are already concerned about how to demonstrate compliance with everything from re-training its sales teams and supervisors to reformatting clients' profiles so they are easier to monitor for ongoing suitability, say compliance professionals. A recent FINRA webinar about the new requirements attracted more than 2,200 viewers. Brokerages do not need to be in the midst of an exam to have that conversation. Some brokerages have requested to sit down with FINRA for a "walk through" to discuss their new programs, which include changes to account opening forms and procedures for back-office staff. The discussion will lead to "more targeted and efficient exams when we walk in on Day One prepared with this information," Axelrod said in an email. Brokerage compliance professionals who hold off on that discussion until an exam begins should think about a presentation for on-site examiners, outlining the firm's new suitability enhancements, Axelrod said. The highlights could include how their firms are keeping track of changes to client information and amending account documents. ANSWER THE SURVEY A voluntary survey that FINRA released in February about brokerages' risk control efforts is another step for FINRA to better understand the industry and make exams less time-consuming, Axelrod said. There's just one problem: Less than half of FINRA's nearly 4,430 brokerages responded to the survey. Compliance professionals who want to avoid devoting extra hours to educating examiners should consider participating at that time. The survey, which covers everything from data security concerns and custody procedures for client assets, was part of a response to brokerages' concerns that examiners did not understand their business model before arriving, Axelrod said. It is not a "gotcha tool" to uncover compliance problems at brokerages, she said. The survey complements other data collection efforts to help examiners do more of their work before setting foot in a brokerage. Last year the regulator began collecting vast amounts of information before its exams to determine potentially risky practices before arriving on site. FINRA also recently unveiled a pilot program to examine sales practices, Axelrod said. The regulator is requesting data in 50 categories from 20 brokerages this year to help it look for potential violations involving brokers and branch offices. Gathering those details may be tedious. But starting from scratch after examiners first come knocking promises to be a bigger headache. Link this Share this Digg this Email Reprints

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