FINRA Points Out Common Mistakes for Firms to Avoid

FINRA established OATS as an integrated audit trail of order, quote and trade information for all NMS stocks and OTC equity securities. FINRA uses this audit trail system to recreate events in the life cycle of orders and more completely monitor the trading practices of member firms. Under FINRA Rules 7410 – 7470, FINRA member firms are required to develop a means for electronically capturing and reporting to OATS specific data elements related to the handling or execution of orders, including recording all times of these events in hours, minutes, and seconds and to synchronize their business clocks. These rules were approved by the SEC March 6, 1998.

In the area of vendor management, vendors are often omitting certain disclosures, Mirchandani also said. In fact, one big takeaway from the session was that firms need to do their due diligence before hiring vendors.

If any violation has been identified early in the exam process, it behooves a firm to try to fix it as soon as possible, Gary Distell, chief compliance officer at Guggenheim Securities, said during the same session. "The quicker the better," he said, adding: The best case scenario is "if you can do it before" FINRA comes to your firm, "second best is if you can do it before they leave your firm and the third best is before they issue the letter," because all those things lead to better outcomes.

Eric Field, director of capital markets compliance at Robert W. Baird & Co., cautioned firms that if they make specific pledges in writing to FINRA about making fixes to gain compliance, they have to deliver. So if you don't think you can achieve a fix by a certain date don't make a promise to do it by that date, he stressed.

During another session, in which attendees got to ask FINRA senior staff questions, Gene DeMaio, executive vice president at FINRA, noted "we are doing quite a bit" with machine learning (ML) now, including "prototyping a number of surveillance reviews." So far, FINRA has been seeing positive results from the use of supervised learning that can spot deceptive practices at firms, he said. FINRA is also looking at how it can "incorporate unsupervised learning to look at trading anomalies on the option side" — situations where there's a trade that wouldn't yield an exception report about a potential issue, he told attendees.

Also discussed was the transition away from Libor. While large member firms have largely been working to reduce their exposure, Ornella Bergeron, senior vice president at FINRA, said it's important to make sure that midsize and smaller members firms are prepared also, so FINRA started reaching out to them to assist.

Meanwhile, there's a lot of "transformation work going on" at FINRA, she also said. For example, FINRA is consolidating its three exam programs, a move that the BD self-regulator started last October. 2020 is going to be the year of implementation of a new exam program where there will be one integrated program based on the business model of each firm and each firm will be tracked through its business model, she noted. Examiners will be organized around that business model, and there will be a single point of accountability for risk management and exam oversight.

Sit-down meetings will also become optional starting in 2020, Bergeron said. "We have made some changes already," including in the timing of exams based on feedback, she said, noting FINRA is now giving more time in between exams, with a six-month window between exams and a three-month window for those firms with more risk.

Earlier, in a fireside chat with FINRA CEO Robert Cook, discussing the SEC's Regulation Best Interest (Reg BI), he said: "We will be looking at our rulebook to determine whether there are aspects of our rules that might need to be modified. We'll probably do that in phases." In the first phase, FINRA will determine if there are rule amendments and modifications that need to be made because they may be creating conflicts or inconsistencies in relation to Reg BI. "I don't think there are a lot of those, but there are some cleanup" actions that need to be taken, he said.