Every year, FINRA publishes its Annual Risk Monitoring and Exam Priorities to highlight issues to its regulatory programs.
This year’s letter takes a new approach by focusing on those topics that will be materially new areas of emphasis for risk monitoring and exam programs in 2019.
– Online Distribution Platforms
Firms are now heavily involved in the distribution of securities through online platforms. While some platform distribution are owned and operated by broker-dealers, others are operated by unregistered entities which may use member firms as selling agents or brokers of record.
Of concern to FINRA is that some member firms assert they are not selling or recommending securities when involved with online distribution platforms despite evidence to the contrary which can include handling customer accounts and funds or receiving transaction based compensation.
– Fixed Income Mark-Up Disclosure
FINRA will review compliance with firms mark up or mark down disclosure obligations on fixed income transactions with customers pursuant to amendments to FINRA Rule 2232 (Customer Confirmations) and MSRB Rule G-15 which became effective May 14, 2018.
In order to assist firms with compliance with mark-up requirements, FINRA developed a Mark-up/Mark-down Analysis Report that is available to individual firms. FINRA will also review any changes in a firms behavior that might be undertaken to avoid their mark-up and mark-down disclosure obligations.
– Regulatory Technology
FINRA plans to review how firm are using various regulatory technology tools to make their compliance more efficient. This includes addressing related risks, regulatory concerns such as those relating to supervision and governance systems, third-party vendor management, safeguarding customer data and cybersecurity.
– Sales Practice Risks
Suitability remains a top priority for FINRA. Specific areas of focus may include 1) deficient quantitative suitability determinations 2) overconcentration in illiquid securities 3) recommendations to purchase share classes that are not in line with customer’s investment time horizon.
A top priority for FINRA remains investors who are retired or approaching retirements and how firms are protecting them from fraud, sales practice abuses and financial exploitation.
FINRA will assess the firms’ controls related to associated persons outside business activities and private securities transactions, including APs raising funds away from their firm and outside of the firm’s supervision.
– Operational Risks
Firms having significant interest in digital assets are encouraged to notify FINRA if they plan to engage in such activities even where a membership application is not required. Additionally, FINRA will help firms with compliance efforts by providing a Cross Market Supervision Report Card. These reports help firms identify potential manipulation across multiple firms, markets, and products and proactively address related compliance risks. Additionally, FINRA will assess the firm’s compliance with the Customer Due Diligence rule that requires firms identify beneficial owners of legal entity customers, understand the nature and purpose of customer accounts, conduct ongoing monitoring of cusstomer accounts to identify and report suspicious transactions and update customer information.
– Market Risks
FINRA will review the firm’s best execution decision-making where the firm routed all customer orders to the best market given the size and types of transactions. Moreover, FINRA will continue to monitor manipulative trading in correlated ETPs. FINRA will also continue to monitor the firms’ compliance with the Market Access Rule, short sales, and short tenders.
– Financial Risks
FINRA will review the policies and procedures for identifying, measuring, and managing credit risk. Additionally, FINRA will evaluate a Firm’s liquidity planning, including whether they have a reasonable process to regularly assess the adequacy of their liquidity pools and update their stress test assumptions. The focus has moved on whether the stress test assumptions have been updated in light of changes in the marketplace.
The above is simply a brief synopsis of the FINRA Exam Priorities Letter. More detail may be found by clicking here.