By: Lewitas Hyman PC
On January 5, 2016 the Financial Industry Regulatory Authority (“FINRA”) published its 11th annual Regulatory and Examination Priorities letter containing its areas of focus in 2016. Within the letter FINRA highlights three broad areas of focus – culture, conflicts of interest and ethics; supervision, risk management and controls; and liquidity. The letter goes on to discuss other narrowly focused topics relating to sales practices; financial and operational controls; and market integrity.
Broad Issues of Focus
Culture, Conflicts of Interest and Ethics- Although FINRA recognizes there is no universal definition of the term “firm culture,” they use it while referring to the set of explicit and implicit norms, practices, and expected behaviors that influence the decision making process within the normal course of conducting firms’ business. FINRA will concentrate their focus on the policies firms use to create, communicate and conform to their own culture, specifically concentrating on five indicators of firms’ cultures: (1) whether control functions are valued within the organization; (2) whether policy or control breaches are tolerated; (3) whether the organization proactively seeks to identify risk and compliance events; (4) whether supervisors are effective role models of firm cultures; and (5) whether sub-cultures (e.g., at a branch office, a trading desk or an investment banking department) that may not conform to overall corporate culture are identified and addressed.
Supervision, Risk Management and Controls – Reminding firms that FINRA’s rules require them to establish and maintain a system of supervision with a goal that their associated persons attain compliance with securities laws and regulations as well as FINRA’s rules, FINRA is focusing on four areas; (1) management of conflicts of interest (targeting firms’ incentive structures while drawing on their suitability focus); (2) technology (with an emphasis on cyber security and technology management); (3) outsourcing (reminding firms they are responsible for the supervision of third parties and shall exercise initial and continued due diligence when dealing with a third-party provider); and (4) anti-money laundering (particularly accounts excluded from aspects of anti-money laundering surveillance).
Liquidity – Noting that firms’ failures to manage liquidity has contributed to not only individual firm failures but systemic crises, FINRA will continue to monitor firms’ liquidity management as set forth in Regulatory Notice 15-33, e.g., that firms rigorously evaluate their liquidity needs related to both market wide and idiosyncratic stresses, develop contingency plans so that they have sufficient liquidity to weather those stresses, and conduct stress tests and other reviews to evaluate the effectiveness of their contingency plans.
Other Areas of Focus
– Suitability and Concentration
– Seniors and Vulnerable Investors
– Sales Charge Discounts and Waivers
– 529 College Savings Plans (529 Plans)
– Private Placements, the JOBS Act and Public Offerings
– Non-Traded REITs and Direct Participation Programs (DPPs)
– Excessive Charges to Customers in New Bond Sales
– Outside Business Activities
Financial and Operational Controls
– Market-Maker Net Capital Exemptions
– Exchange Traded Funds (ETFs)
– Fixed Income Prime Brokerage Internal Audit
– Client Onboarding
– Transmittal of Customer Funds
– Vendor Display Rule
– Market Access
– Fixed Income
– Regulation SHO
– Cross-Market and Cross-Product Manipulation
– Audit Trail Integrity
FINRA’s letter urges compliance staff, supervisors and senior business leaders to consider the broad issues and the targeted topics addressed in their letter as part of risk management initiatives and priorities.