On January 6, 2015, FINRA released its tenth annual Regulatory and Examination Priorities Letter (the “Letter”) identifying its areas of examination and focus for 2015. As a preliminary matter, FINRA indicated five global deficiencies of broker/dealers and registered representatives it observed in 2014. Those areas of concern include: (1) putting the customer interests first; (2) the standards of ethical behavior and the need to protect firm culture against individual bad actors; (3) developing strong supervisory and risk management systems; (4) the sale of novel products and services remaining a “regulatory flashpoint”; and (5) the importance of firms identifying and mitigating conflicts of interest. According to FINRA, a central failure in 2014 was firms failing to put the customers’ interest first, thus leading to devastating and lasting consequences for the investor. FINRA called for firms to address these recurring challenges in 2015.
In regards to sale practice, FINRA will focus on sales and distribution practices surrounding products such as: interest rate-sensitive fixed income securities, variable annuities, alternative mutual funds, and non-traded real estate investment trusts. Importantly, FINRA will require firms and registered representatives to perform accurate due diligence and describe the above mentioned products to retail investors in a way that they can understand. FINRA also remains concerned about suitability relating to the country’s population of senior investors. According to FINRA, the consequence of unsuitable investment advice can be severe for this growing investor group. FINRA examiners will review the suitability of investment recommendations made to seniors with a special focus on the products listed above. Examiners will also focus on how firms’ train registered representatives in handing senior investor issues. FINRA urges firms in 2015 to review their procedures and identify ways to improve treatment to senior investors.
FINRA’s 2015 financial and operational priorities include conducting examinations of firms’ approaches to cyber-security risk management, in light of recent events highlighting detrimental consequences of cyber-attacks that destroy data. FINRA also noted that outsourcing will be a priority area of review during 2015. To that end, FINRA plans to examine the due diligence and risk assessment firms engage in when dealing with potential providers. FINRA will also focus on whether firms are accurately reporting reportable U4 and U5 events.
Maintaining fair and orderly markets will be the third central objective for FINRA in 2015. FINRA will continue to examine the quality of customer order executions. In regards to fixed income, FINRA will increase its priority of reviewing firms’ pricing practices – including whether firms have the proper supervision and controls in place. FINRA also plans to continue to “enhance both its equities and options cross-market surveillance patterns.” To that end, along with continued surveillance, FINRA will continue to bring actions against firms involved in cross-market and cross-product manipulation. Commencing in 2015, FINRA plans to launch a pilot program to conduct fixed income-based examinations focusing on “trading issues, including related controls.” In regards to audit trail integrity, FINRA has compiled a team to focus on identifying potential equity and audit trail issues that are not normally detected through “routine compliance sweeps.”
It is important for FINRA firms and associated persons to review the entirety of the Letter and understand FINRA’s concerns with respect to applicable areas. Firms should use the topics discussed in the Letter as a starting point for updating their policies and procedures in 2015. If you have any issues relating to addressing the topics raised in the Letter, please feel free to contact Lewitas Hyman PC.
A copy of the Letter is available in the link below: