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Broker-Dealer Exams Face Dramatic Overhaul

By Rita Raagas De Ramos May 16, 2019

Self-regulator Finra is looking to dramatically change how broker-dealers are examined. The industry organization is embarking on a broad review and transformation of its examination program that is expected to develop specific expertise for examiners, create more risk-based exams and make the entire process more efficient, according to Bari Havlik, Finra’s senior vice president of member relations and education.

One of the goals is to “pull those exams together” and tailor them according to the business models of Finra member firms, Havlik said Wednesday at Finra’s annual conference in Washington D.C.

Havlik was hired by Finra in April last year to lead the SRO’s member regulation program, which includes surveillance and examination programs for member firms.

Havlik, who began her career in the financial services industry in 1982, was the chief compliance officer at Charles Schwab before she joined Finra.

Tailoring the exams according to business models will help eliminate duplication that currently exists when member firms are subjected to exams, according to Havlik.

The business models-based exams will be categorized according to six groups — retail, capital markets and investment banking, trading and execution, clearing and carrying, and diversified.

Each group will then have sub-groups. The retail group, for example, will have eight sub-groups — retail-small, retail midsize and large, retail small incentive compensation, retail midsize and large incentive compensation, fintech, retail with carrying and clearing activities, public pooled investment vehicles and variable annuities, and private placements.

The tailoring will apply to all kinds of Finra exams, according to Havlik.

For cybersecurity exams, for example, Finra may focus on firms that don’t have the same kinds of resources that larger firms have, Havlik said.

Havlik said a byproduct of the tailored exams would be getting better data on trends in the broker-dealer industry.

“This is a starting point,” she said.


When it comes to cycle exams, Havlik said Finra would want to prioritize them according to impact, size of the firm and whether the cycle exams have been back-to-back. For example, Finra could give a vast majority of firms a gap of six months from the end of one cycle exam to the start of a new one, while higher risk firms could be given a gap of three months, according to Havlik.

Havlik said Finra is aiming to implement changes it can make now while working on the longer-term goal of transforming the exam program.

Meanwhile, Finra is also aiming to reduce or eliminate overlaps between its own exams and those of the SEC.

“We’ll do everything in our power to make sure we’re not overlapping,” Havlik said. “It’s not a good use of our resources.”

Havlik encouraged firms experiencing an overlapping of exams from Finra and the SEC to elevate it “up the chain.”