Officials at the Financial Industry Regulatory Authority (FINRA) released a “Progress Report on FINRA360” last month and the regulator is making the case that it has started to reinvigorate itself, particularly in the areas of enforcement and qualification exams.
As you may recall, FINRA360 is an effort to see if “FINRA is operating as the most effective and efficient self-regulatory organization (SRO) we can be,” according to the introduction by Robert Cook, FINRA president and CEO. “We launched FINRA360 in March 2017 … The time was right for such a review. In the 10 years since the NASD and NYSE Regulation merged to form FINRA, the industry and financial markets have changed significantly.”
New Enforcement Structure
For the past year, the report focuses on a major realignment within its enforcement structure.
“Until last summer, FINRA maintained two distinct enforcement teams within the organization — one handling disciplinary actions related to trading-based matters found through our market surveillance and trading examination programs, and the other handling cases referred from other regulatory oversight divisions within FINRA, such as sales practice examinations and our Office of Fraud Detection and Market Intelligence,” according to the report. “Through FINRA360, we analyzed stated firm concerns that these dual programs sometimes resulted in duplication of effort and inconsistency of results.”
Starting in July 2017, FINRA took action and combined the enforcement teams into a single Enforcement Department led by an executive vice president of enforcement. The changes “are designed to recognize and reinforce the central role” that FINRA plays in keeping firms from straying.
“In addition, the new Executive Vice President, Susan Schroeder, now reports directly to FINRA’s Chief Executive Officer (CEO) and also sits on FINRA’s Management Committee,” according to the report. “The unified structure will improve FINRA’s ability to streamline investigations, share information, enhance consistency and maximize our resources to protect investors and the markets.”
In fact, the report finds that the combined FINRA enforcement team:
- “Provided clear communication to the industry and the public of FINRA’s approach to pursuing and resolving enforcement cases.”
- “Developed and began implementing a department-wide restructuring to align roles and responsibilities across the department.”
- “Created a new senior management role, the counsel to the executive vice president of enforcement, responsible for reviewing the enforcement docket holistically and identifying and escalating matters for discussion to ensure a cohesive organization-wide approach to novel or interpretive issues.”
- “Began developing a new business process to centralize and enhance reviews of enforcement’s recommendations to achieve greater consistency and transparency in outcomes.”
- “Consolidated the enforcement litigation docket to achieve a unified approach, strategic staffing and shared best practices in all FINRA disciplinary litigations.”
Changes to the Qualification Exam Process
Another area of important reform is the restructuring of the qualification exam process.
“FINRA administers qualification examinations that are designed to establish that persons associated with broker-dealers have attained specified levels of competence and knowledge pertinent to their function,” according to the report. “Over time, the qualification examination program has increased in complexity to address new products and functions, and related regulatory concerns and requirements. As a result, there are currently 16 representative level exams, with considerable content overlap across them.”
In an effort to improve its examination program, FINRA is “launching a new Securities Industry Essentials (SIE) exam and revising the representative-level qualification exams. The restructured program, which aligns with our goal of creating efficiencies through FINRA360, is designed to eliminate duplicative testing of general securities knowledge on the representative level exams by moving such content into the SIE,” according to the report.
“The SIE will test fundamental securities-related knowledge, including knowledge of basic products, the structure and function of the securities industry, the regulatory agencies and their functions and regulated and prohibited practices, whereas the revised representative-level exams will test knowledge relevant to day-to-day activities, responsibilities and job functions of representatives,” according to the report. “The restructured program also eliminates several representative-level registration categories and related exams that have become outdated or have limited utility.”
In fact, as of Oct. 1, 2018, “new applicants seeking to register as representatives must pass the SIE and a revised representative-level exam, such as the revised General Securities Representative (Series 7) exam, appropriate to their job functions at the firm with which they are associating before their registration can become effective,” according to the report. “Under the restructured program, individuals are not required to be associated with a member firm to be eligible to take the SIE exam. Further, a passing result on the SIE will be valid for four years.”
The new exam process “will enable prospective securities industry professionals to demonstrate to potential employers a basic level of knowledge prior to a job application. Individuals can also use the SIE to assess their readiness to enter the securities industry. However, passing the SIE alone will not qualify an individual for registration with FINRA,” according to the report.
Individual registration requires a person to pass “an appropriate qualification exam for representative or principal status and satisfy the other requirements relating to the registration process,” according to the report. “In addition to these changes, FINRA is evaluating other possible improvements to the qualification process.”
The regulator is “considering a mechanism by which individuals could maintain their qualification status when no longer associated with a firm through the satisfactory completion of continuing education requirements,” according to the report.
“We also are considering an annual, credit-based requirement that would harmonize the regulatory and firm elements of the current continuing education program,” according to the report. “We look forward to collaborating with the Securities Industry Council on Continuing Education as well as with our regulatory partners in exploring these changes in the near future and seeking public comment.”
Overall, FINRA officials are not done and say that they have much more to do.
Cook says in the report that over the coming year FINRA will be focusing on “other areas where we think we can achieve additional meaningful change. These may include larger organizational changes as well as smaller improvements that collectively will have significant impacts on our day-to-day interactions with the firms we regulate and the investing public we protect. Expect more to come.”