I am still catching up on things that happened over the last couple of months, as I dig myself out of the hole created by (finally) completing a 39-day FINRA arbitration (SOC filed in 2014, hearing started in 2019). Truthfully, it seems there’s been a lot of the usual. You know, FINRA taking formal disciplinary action against some poor unregistered back-office guy for not disclosing an outside brokerage account, or against some rep who had the temerity to get named as a beneficiary under the will of a longstanding client. You get the drift. Big, important stuff.
But, in addition to reviewing the various Enforcement actions that FINRA has taken, I have also gone back to see what FINRA has published on its website, as there are often gems buried there. Well, I was not disappointed, as I found this, a podcast from a month ago called “Single Points of Accountability: Navigating Firms’ Experiences with FINRA.” Happily, as I’ve pointed out before, if you are interested in a FINRA podcast, you don’t actually have to listen to it, as FINRA is kind enough to provide the transcript, so you can quickly skim it, looking only for the good stuff. Like, for instance, this wonderfully candid admission by FINRA made in a different podcast back in June: “[I]ntelligence is a new concept for FINRA.”[1]
Anyway, the title of this particular podcast intrigued me, as I had no idea what was meant by “Single Points of Accountability.” I mean, I am well aware that for some reason, FINRA decided about two years ago, basically, to abandon any kind of geographic-oriented approach to its relationships with its member firms. As a result of that decision, instead of being regulated by the District Office most proximate to your particular location, you could be regulated by someone who may be on the other side of the country. That’s because FINRA determined that being located near its members didn’t really matter; what mattered more was having a person handle the relationship with your firm who, theoretically, anyway, knows something about the kind of business you conduct.
So now, rather than being assigned to its local District Office, each BD is assigned to one of five groups: retail, capital markets, carrying and clearing, and diversified, and trading and execution. And within its particular group, each BD is assigned a specific human being – the Single Point of Accountability. Sounds easy enough.
Sadly, the infrastructure FINRA erected is more complex than that. According to this podcast, each BD also has to deal with both a risk monitoring director and a risk monitoring analyst. So, now we’re up to three people. How do their respective roles differ? Well, I will let the podcast speak for itself there:
The risk monitoring director’s primarily responsible for managing the day-to-day operations of the analysts, so the underlying firms that they’re each assigned, making sure that the assessments, the risk monitoring work itself, is being done timely and it’s being done accurately. The SPoA role is more so focusing on strategic goals and consistency across the larger group. So, by way of example, I oversee the retail private placements and the retail pooled investments and variable annuities groups. Those groups encompass almost 500 firms, so I’m looking at, across those firms, peer to peer analysis, how we’re handling the firms consistently, having discussions with firms, not treating all firms the same, we’re looking at them independently as well as against their peer group. So, the RMDs are focused on the day to day. The SPoA is focused on the macro level of the group.
Ok, that’s all fine, I guess. And I even understand FINRA’s thinking behind the move to a business-based rather than geography-based approach to selecting a firm’s primary points of contact. But, here’s the thing: as I kept reading this transcript, and these two SPoAs started telling about their supposed actual experiences with the member firms for which they had responsibility, it sounded more and more like I was reading some fiction story, or a story about some other regulator, because it sure as heck doesn’t sound like what my clients share with me about their relationship with FINRA.
To their credit, these guys did admit that BDs simply do not trust FINRA, and that their biggest challenge is earning that trust. As one of them put it – and accurately so, in my view: “I was on the exam side for 12 or 13 years, and what we often heard was, I’m afraid to say something to FINRA because they’re [sic] going to be retribution. You guys are going to do an exam.” That is 100% true. Given this skeptical view of FINRA, firms choose to avoid FINRA. Knowing this, these SPoAs maintain that they’ve had great success turning that view around. The problem is: what they say they’re doing to earn members’ trust just does not comport with reality.
They claimed this: “We’re happy to field any and every question that you guys may have. And if it’s not an answer that is readily available for us, we will get you the right person within FINRA. Allow us to kind of do the work for you a little bit versus you trying to figure out who the heck do I call at FINRA.”
Stated somewhat differently, but to the same effect, they also said: “But we’re that person that you can reach out to instead of pulling three names and reaching out to three different people to say, Hey, can we just have a quick call to talk? Because I have some concerns. And it’s a 15-minute conversation. We get it resolved and we move on.”
And this: “We are truly here to be that Single Point of Accountability. The buck stops with us. If you reach out to us, we will be back in touch with you. We will get you the guidance or get you in touch with the right people within FINRA.”
No offense to these guys, but it is well known that apart from some notoriously helpful groups – CRED and MAP come to mind – it can be nearly impossible to get an answer from FINRA. The notion that FINRA will “get it resolved,” or even provide guidance, as the result of a 15-minute call is fanciful, at best. Examiners are loath to give black-and-white answers, as they don’t want to be held accountable.[2] As a result, firms tend not to bother even to try and obtain advice from FINRA. What would be the point? As these guys acknowledged, no firm wants to bring an issue to FINRA’s attention if not only will no straight answer be provided, but it creates the risk that FINRA will then open an exam or, at a minimum, hold it against you.
With that said, I suppose we should at least give FINRA some small degree of credit for at least acknowledging the image problem it has with its members, and for hoping to do something to remedy it. As these two guys put it, perhaps aspirationally,
we can be a very valuable partner. Our interests are aligned with firms in ensuring that FINRA understands the firm’s business and its risks, and that our risk monitoring and examination programs are tailored accordingly. So, we also, at the end of the day, want to ensure that firms get things right in the interest of investor protection and market integrity. So, no issue is too small, come to us, partner with us. We’re happy to work through things.
I like the sound of this, but, sadly, I will believe it when I see it. It is going to take a lot of work to turn this battleship around. Firms today simply do not view FINRA as a “partner,” someone that’s going to offer help and advice. No, FINRA is largely seen as the enemy, happy to bring Enforcement actions for the slightest rule violations. If FINRA can start even with baby steps, like having two SPoAs actually do what they promised here to do, then, perhaps, it can one day rehabilitate its tattered image.
[1] Ok, maybe that’s not a fair shot. I should note that the podcast where I found that remark was called “FINRA’s Financial Intelligence Unit: Connecting the Dots,” so the use of the word “intelligence” in this quote had particular meaning. Also, the speaker was Blake Snyder, a good guy, and someone I actually hired 20 years ago when I was the District Director of the Atlanta District Office. Still, it’s pretty funny when taken out of context!
[2] Even worse, even when an examiner offers an opinion, you still can’t safely rely on it. FINRA is perfectly free, come the next exam, to give a contrary opinion and hold against you the fact that you relied on the “wrong” advice provided earlier. Why? Because the duty to comply resides solely with the firm, and cannot be delegated to anyone, not even to FINRA.
