The Financial Industry Regulatory Authority (“FINRA”) published its annual Regulatory and Examination Priorities letter, concentrating on specific areas of focus within five broad areas – high-risk and recidivist brokers, sales practices, financial risks, operational risks, and market integrity.
Broad Issues of Focus
High-Risk and Recidivist Brokers
FINRA will pay particular attention to firms’ hiring and supervision of high-risk and recidivist brokers, including whether firms establish appropriate supervisory and compliance policies and procedures for such brokers. FINRA will rigorously review customer interactions with brokers who fit into this category, firms’ procedures for hiring or retaining statutorily disqualified and recidivist brokers, firms’ supervisory plans tailored to detect and prevent future misconduct, branch office inspection programs, and firms’ supervisory systems for branch and non-branch office locations. As has always been the case, FINRA will also monitor the timely submissions of disclosures required on Forms U4 and U5 for these individuals.
Noting that investor protection lies at the heart of FINRA’s mission, the agency reaffirmed its commitment to making the protection of senior investors a top priority. Other sales practices that FINRA will focus on are: product suitability and concentration, excessive and short-term trading of products intended to be held for long time periods, outside business activities, private securities transactions, social media, and electronic communications retention/supervision.
FINRA will continue to assess firms’ funding and liquidity plans, paying particular attention to whether firms adequately evaluate their liquidity needs related to stresses in the market as well as idiosyncratic stresses. It will further assess firms’ financial risk management practices, including firms’ readiness, communication plans, risk metrics, triggers, and contingencies. FINRA further intends to review firms’ implementation of the obligations established in the first phase of the amendments to FINRA Rule 4210, which requires firms to receive a minimum amount of margin from their counterparties with respect to covered agency transactions.
FINRA highlights Cybersecurity as one of the most significant threats to firms. It will continue to assess firms’ programs and readiness to protect against, and mitigate the risks associated with cybersecurity. FINRA may review practices and procedures of firms’ policies for preventing data loss, controls used to monitor and protect data, and controls to protect sensitive information from insider threats. FINRA will also focus on ensuring that firms have proper testing procedures for their internal supervisory controls, that firms have implemented adequate controls and supervision to protect customer assets and ensure compliance with SEC Regulation SHO, and that firms have proper anti-money laundering programs and municipal registrations where applicable.
Detecting and deterring manipulation remains one of FINRA’s most critical priorities. The agency will continue to work with firms on means to assist them in this area. FINRA will also focus on ensuring that firms comply with their best execution obligations, and to that end expects firms to use alerts provided by FINRA to address items before they become widespread and long-standing. FINRA further noted that the data collection obligations of the Tick Size Pilot will continue in 2017 and that it continues to see the need for firms to improve their compliance with the Market Access Rule. Finally, FINRA plans to proceed with a pilot trading examination program, which will help determine the value of conducting targeted examinations of smaller firms and to continue to enhance its fixed income surveillance program.
Click here to view the 2017 Regulatory and Examination Priorities Letter [link to http://www.finra.org/sites/default/files/2017-regulatory-and-examination-priorities-letter.pdf]
Click here to read about the SEC Examination Priorities for 2017.
Please contact Chicago Principal Associate Doug Hyman with questions about our firm’s FINRA regulatory practice.