To tell your Finra risk monitoring analyst about an issue or turn a blind eye for fear it will trigger a full-blown exam and potential enforcement. It's a question every broker-dealer compliance officer will likely debate during their career, according to one Finra official.
“There’s been a lot of emphasis over the past two days about the effectiveness and encouragement to firms reaching out proactively to risk monitoring and having a proactive dialogue, but a lot of folks are asking, should they be afraid to call their risk monitoring analyst for fear that it will raise red flags about what they’re calling about?” Kayte Toczylowski, vice president of member relations and education, said during Finra's annual conference yesterday.
The regulator’s risk monitoring department is responsible for assessing financial, operational and business conduct risks that exist within individual member firms and across the industry. Regulators said the intelligence from firms can help them head off national or even global problems.
There’s always been a debate in the industry about whether to contact your risk monitoring analyst, Greg Ruppert, executive vice president of member supervision at Finra, acknowledged. “Should you look for something going wrong, because if you find something, what do you do and how do you approach it?” he said.
Ruppert, however, said the conversations are vital to helping Finra head off industry-wide issues. Because of relationships with the SEC and other regulators, “we’re positioned to be able to speak with one voice about what we potentially see across the industry," he said.
It’s also central to what he called his aggressive push to become more proactive to issues earlier, rather than being reactive once they’ve spread.
“As we talk about how we become more proactive, we might hear from one firm that there is a particular issue, maybe it’s cyber-related or vendor-related. We can then move laterally throughout the entire industry and assess, is this a single issue or more of a global issue? We can put out reg notices, we can push information out via email, via our Linkedin portals. But from that standpoint we’re trying to, again, benefit the entire industry from the intelligence that we’re able to get from there,” Ruppert said.
Ruppert said open dialogue with firms is critical to Finra’s mission of being proactive, as issues or crime arises that may harm investors or the markets, rather than reactive after damage is already done.
Stephanie Dumont, executive vice president of market regulation at Finra, said that the two-way dialogue helped Finra protect more banks and institional investors when the regulator halted trading in the stock of a “large bank”—presumably Silicon Valley Bank, which collapsed March 13.
“We had an event where a large bank, as everyone knows, had financial issues and [Finra halted trading in its stock]. And we had a lot of concerns about what happens to puts that are out there during this halt. Our options group talked to RMAs [risk management analysts] to look at the firms that had investors that had the highest positions in those investments and they reached out and had great conversations that focused the banks in communicating with these customers,” Dumont said.
Put options are traded on various underlying assets, which can include stocks, currencies, commodities, and indexes and allow the buyer to sell or exercise the underlying asset at a specified strike price.
“It wasn’t an enforcement issue, it was a ‘thank you’ for helping us think about this issue and make sure we’re communicating with our customers,” she added.
Having two-way conversations with RMAs “doesn’t encourage something nefarious happening. No exam team is immediately launched. We do have our regulatory oversight responsibilities. But at least from an initial standpoint, we want to be that initial contact so we can provide guidance, resources and benefits, not just to you, but you’re also benefiting all of your peers in this audience. And maybe the next day or the day after that, they’re providing some intelligence that is actually going to benefit you,” Ruppert said.
Toczylowski asked if Finra’s enforcement department is “routinely opening up cases based on conversations that firms are having with their risk monitoring analysts?”
Kelly said that isn’t the case, adding that in the near-decade he has worked at Finra, he hasn’t seen a single case that was opened because a risk monitoring analyst reported the conversation to enforcement.
“We’d quickly put our risk monitoring analysts out of business if they were routinely calling us after conversations that you all have with them. Just to give you some comfort, I understand your hesitancy, but there are probably dozens of these calls a day and thousands of calls a year, where firms are talking to their risk monitoring analysts. In the nine years I’ve been at Finra, I can’t think of a single instance where a risk monitoring analyst called us and said, ‘Hey this question, you should open a matter because of this,’” Kelly said.