Financial Regulatory Forum

“Big data” tools will improve regulatory oversight, FINRA’s di Florio says

By Guest Contributor
February 25, 2014

By Stuart Gittleman, Compliance Complete

NEW YORK, Feb. 25 (Thomson Reuters Accelus) - The Financial Industry Regulatory Authority is developing a suite of “big data” information sources and analytics to improve regulatory oversight of securities firms, according to Carlo di Florio, FINRA’s chief risk officer and head of strategy.

Leveraging technology and analytics can make for a “unique moment in regulation [that lets regulators] see things they couldn’t have seen or understood as well before,” di Florio said at an event this week hosted by the Securities Industry and Financial Markets Association compliance and legal society.

Making better use of “big data,” an idea FINRA chief executive Rick Ketchum has been championing, can better focus FINRA’s resources by informing the regulatory process, di Florio said.

It can also pinpoint particular brokers, products and customer accounts that raise red flags for regulatory analysts, but the aim is not to use FINRA’s resources to identify potential deficiencies that firms would have been unlikely to find on their own in order to bring enforcement actions, di Florio said.

The tools can help drill down to individual brokers and customer accounts to identify individual instances of risks such as suitability and concentration risk, especially for seniors, private offerings and day-trading vehicles like certain ETFs.

Di Florio, who until last year headed the Securities and Exchange Commission Office of Compliance Inspections and Examinations, oversees four FINRA offices: risk, emerging regulatory issues, enterprise risk management (“ERM”) and strategy.

Rather than looking for “gotchas,” di Florio said the efforts of his colleagues and other FINRA teams are instead aimed at understanding potential perils, such as product offerings or customer mixes, that firms face, and improving compliance and supervision. That way FINRA and the firms can mitigate any risks before customers or market integrity are harmed.

This better fits FINRA’s role in investor protection of preventing, not just punishing, customer harm or market abuse, and will make for better and more effective self-regulation, di Florio added. Nevertheless, longstanding or egregious violations, especially after a problem has been brought to a firm’s attention, can lead to enforcement action.

Improving FINRA’s ERM program will also enhance its internal governance, risk management, quality control and compliance functions, which is particularly important following a 2012 U.S. Government Accountability Office report faulting the SEC for “limited or no oversight” of certain FINRA operations.

In response to the report, the SEC defended its oversight of FINRA as “robust,” a word FINRA likewise used to describe the SEC program for overseeing self-regulatory organizations. The report noted that both the SEC and FINRA were working to address potential problem areas that the GAO examination found.

Firms may not see FINRA’s improvements in all of its examinations or regulatory proposals because much of the work has been behind the scenes, or in coordination with the SEC, the Commodity Futures Trading Commission or international regulators, di Florio said.

But certain exam priorities have been better focused because of the dashboard approach of concurrently monitoring for several risk factors, di Florio noted, saying the work has provided a deeper understanding of fixed income, emerging markets, customer profiles and account or product anomalies.

Other exam priorities, such as concentration risk, dealings with seniors and near-retirees, and the suitability of buying and holding certain structured products, have been on FINRA’s watch list for years but examiners are more knowledgeable and the exams are more targeted and efficient, di Florio said.

FINRA’s tools also helped inform its recent focus on individual registered representatives, on financial incentives that can undermine their suitability obligations, and on cybersecurity issues, di Florio added.

Di Florio also said firms are doing a good job in applying their risk analytics. When the SEC’s proposed consolidated audit trail is eventually implemented, FINRA will have more data to help improve its own functions and to help firms improve theirs as well, he added.

(This article was produced by the Compliance Complete service of Thomson Reuters Accelus. Compliance Complete provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges. Follow Accelus compliance news on Twitter: @GRC_Accelus)

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