COMPLIANCE WATCH: Staffing No Excuse For Late Documents To Finra

By Suzanne Barlyn (DOW JONES NEWSWIRES) for The Wall Street Journal, January 22, 2010

Many brokerages are fielding more document requests from the Financial Industry Regulatory Authority--and using staffing problems as an excuse for not meeting deadlines, according to the regulator's enforcement head.

Finra has been opening more investigations because of Wall Street's downturn, which has led to more customer complaints and regulatory issues to review, said Susan Merrill (Above), executive vice president and chief of enforcement, at a recent compliance event in New York. That has meant requesting more documents from brokerages.

Some firms, however, aren't fully cooperating, citing a lack of department resources, said Merrill. Finra's enforcement staff has noticed "significantly reduced responses" to their requests, she said.

A Finra rule requires brokerages to produce documents in response to the regulator's requests during an investigation. Time limits that Finra sets for complying can vary on the scope and urgency of the request.

Firms that don't meet their deadlines prolong the investigation, said Merrill. Certain brokerages have made repeated requests for significant time extensions, often citing staffing and resource shortages as excuses. Brokerages, in some cases, have waited until the last day of their deadlines, or the day after, to request extensions, she said.

One common excuse is that employees who know the location of certain information, such as anti-money-laundering compliance documents, no longer work for the firm, said Merrill.

"It's an intolerable situation," she said.

Scaling back a compliance department doesn't justify not fully cooperating with document requests, even during a challenging economy, she said.

Finra's rule allows the regulator to sanction brokerages who don't comply. It "has teeth, and we're serious about enforcing it," said Merrill.

Slashing compliance budgets is often a tempting option during tough economic times because the department isn't a profit center. In many cases, however, cutbacks in compliance departments are proportionate to those elsewhere in the firm, such as a department that's eliminated because there's no longer a market for its product.

The situation can still difficult for some brokerages, however, because regulatory inquiries sometimes far exceed the number that firms anticipated when setting their current budgets, said Matthew Farley, a New York-based securities lawyer who represents brokerages. "They can't be expected to staff up to respond to a peak number of inquiries and have people sitting around in years when they won't have those inquiries," he said.

Some brokerages, however, may cite staffing cuts to stonewall regulators, said R. Gerald Baker, executive director of the Securities Industry and Financial Markets Association Compliance and Legal Society, which hosted the event at which Merrill spoke. Blaming a delay on staffing problems is often an "answer of last resort," he said.

There may, at times, be legitimate reasons for delays such as difficulties with gathering a substantial number of emails or certain trading documents. In that case it's best to approach the regulator in advance and reach an agreement about a new deadline, or whether to provide the information incrementally as it becomes available, said Baker.

"If you have a legitimate problem, you need to sit down with the regulator and discuss what you can do and how quickly you can do it," said Baker.


Source: http://compliancex.typepad.com/compliancex/2010/01/compliance-watch-staffing-no-excuse-for-late-documents-to-finra.html