Seminar Notes
FINRA and SEC meet with the SIFMA Internal Auditors Division Seminar
By: Stephen Sussman
New York City
May 2, 2008
The purpose of this seminar was to introduce internal auditors to the world of “Regulation” as presented by the regulators. The speakers were from FINRA (formerly NASD and NYSE) and the SEC.
The meeting opened with a group panel of the board committee from the NASD and the NYSE with respect to consolidating the two rule manuals. Together, the organizations will be eliminating duplication and obsolete rules, consolidating phases, submitting to SEC for approval, and accepting comment on all new rules.
When considering the new rules, the following will be considered:
- Principal Base
- Customer Base
- Type of Firm – Tiered
- International Base
As one can see this is quite a cumbersome task. NASD and NYSE want to move this along as quickly as possible, and hope the majority will be done by year end with the entire project being completed within two years.
Enforcement Department from FINRA
The Enforcement Department of FINRA stated they are very active in the sub-prime market but have not brought any cases to date. An ongoing problem is disclosure to customers. A case was cited where a major Broker Dealer stated on every confirmation that they may hold a position in the security in their proprietary account. FINRA did not accept this broad disclosure; the firm fought it very hard but finally settled for a large fine. Some of the other areas that were cited were abuse to seniors, (mostly in annuities), lack of supervision, net capital violations due to clerical errors, and AML violations (Testing, training, not following up suspicious transactions).
New Consolidated Exam Procedures for Dual Members
All Dual examinations will be integrated. Notification will come approximately 30 days prior to examination and only on WEB IR. There will be one internal initial request list, one announcement letter,one initial meeting (interview), one exit meeting, and one exit meeting report. The cycles will remain the same for all firms. These are determined annually by impact and risk. Each firm will be assigned one coordinator. The exit meeting will have a set scheduled date and there will be an opportunity for a Q & A session.
There will no longer be a requirement to respond to an exit meeting report. Also, it will no longer be a requirement to respond to verbal requests, only to the Disposition Letter. (This is also for single member FINRA firms going forward.) Branches will be done when the cycle exam is done. Firms can still be examined at any time for “cause.”
SEC Panel
Exams Programs
The SEC exam program is mostly to oversee the SRO’s exams and to examine areas the SRO’s are not covering. About 65% of the exams are done for cause with the oversight exam done within 12 months. The oversight exam is mostly examining the SRO not the broker dealer itself. This exam will cover the exact time period the SRO did. Another type of exam done is the sweep exam. Not many are being done now; however some areas that are being done are Sub prime valuations, prime brokerage, and Chinese walls.
Investment Asset Management Exams
The SEC Associate District Director of New York has a different approach to examining Investment Managers and Advisors and how the examiners are trained. He does not want to go in with the rule book in hand and an audit checklist and go through a routine audit and check boxes; he wants the examiner to find out everything about the firm before he/she goes there. They will ask questions like: What kind of business do they do? (Customer base, securities, management); How does the firm interact with compliance and what compliance tools and procedures do they use? What conflicts exists?