FINRA Directors Describe How Data Drives Program on High Risk Representatives
Commentary by Steven Lofchie
On an episode of FINRA Unscripted, FINRA directors explained the workings of the agency's High-Risk Representative Program ("HRRP"). The FINRA representatives described how they use technology and data to "identify and monitor specific individuals who pose an elevated risk of misconduct."
According to Brooks Brown, Senior Director of the HRRP Unit and Eric Herbert and John Salerno, Investigative Directors, the FINRA approach when determining if a representative is a high risk, is to rely on two primary technology methods: machine learning and internal intelligence. They said a machine learning model helps to evaluate factors such as complaint disclosures and associations with risky firms, as well as internal intelligence from various FINRA departments. The Directors stated that the identification process includes a qualitative review to ensure accuracy.
The Directors said that once a representative is initially identified as potentially high risk, FINRA will conduct a full qualitative risk assessment to determine if additional scrutiny is warranted. They said the investigations involve records requests, interviews and collaboration with other FINRA departments to ensure comprehensive oversight. The Directors stated that FINRA discloses such an investigation to the representative and the firm and shares intelligence, including whether relevant third parties are involved with the Risk Monitoring and Enforcement teams. They said the program has successfully led to significant findings and sanctions, particularly in cases involving elderly investors and serious misconduct like fund conversion.
Commentary
It is kind of like The Minority Report by Philip Dick (also made into a Tom Cruise movie), but now implemented by FINRA. The premise is that, with enough data and technology, crimes can be foretold and prevented before they happen.
(According to Google, the difference between the book and the movie is that (i) in the book, the protagonist is a 50-year-old balding, out-of-shape police officer and (ii) in the movie, the protagonist is in his late 30s, handsome, and athletic, with a full head of hair, i.e., Tom Cruise. So, the question is, will the FINRA version be more like the book, or more like the movie?)