On January 9, 2020, FINRA published its Annual Risk Monitoring and Examinations Priorities Letter highlighting issues of importance to its regulatory programs. To assist firms in evaluating the state of their compliance, supervisory and risk management programs, FINRA included a list of practical considerations and questions for each topic. Additional resources in the form of endnotes and an appendix to refresh firms’ understanding of their fundamental compliance obligations were also provided. This additional information can be accessed via the link below. Select areas of focus identified for the FINRA unified examination program for 2020 include:
Sales Practice and Supervision
- Ongoing Obligations. FINRA will continue to evaluate firms’ compliance and supervision of sales practice obligations to their customers involving complex products, variable annuities, private placements, fixed income mark-up/mark-down disclosures, representatives acting in certain positions of trust or authority and senior investors.
- Regulation Best Interest (Reg BI) and Form CRS. On June 5, 2019, the U.S. Securities and Exchange Commission (SEC) adopted Reg BI and new rules and forms requiring broker-dealers to provide a brief relationship summary—Form CRS—to retail investors. Firms must comply with Reg BI and Form CRS by June 30, 2020. FINRA staff will work with SEC staff to review firms’ preparedness for Reg BI to gain an understanding of implementation challenges they face and, after the compliance date, will examine firms’ compliance with Reg BI, Form CRS and related SEC guidance and interpretations.
- Communications With the Public. FINRA will focus on how firms review, approve, supervise and distribute retail communications regarding private placement securities, as well as assessing firms’ ability to comply with obligations related to the review and retention of firms’, registered representatives’ and customers’ communication through digital channels such as texting, messaging, social media or collaboration applications.
- Trading Authorization. FINRA will assess whether firms maintain reasonably designed supervisory systems relating to trading authorization, discretionary accounts and key transaction descriptors (i.e., solicitation indicators) as well as detecting and addressing registered representatives exercising discretion without written authorization from the client.
- Ongoing Obligations. FINRA will continue to review firms’ compliance with the ongoing obligations such as market manipulation, Trade Reporting and Compliance Engine (TRACE) reporting, short sales and short tenders.
- Consolidated Audit Trail (CAT). After April 2020, FINRA will initiate a surveillance and investigative program to review firm’s compliance with reporting requirements to the CAT system.
- Order Audit Trail System (OATS). FINRA reminds firms to devote necessary resources to ensure continually high levels of accuracy in their OATS reporting as it remains a critical part of the audit trail data that FINRA uses to operate its cross-market equity surveillance program and meet its regulatory obligations.
- Best Execution. FINRA will review whether firms use reasonable diligence to determine if their customer order flow is directed to the best market given the size and types of orders, the terms and conditions of orders and other factors as required by FINRA Rule 5310 that focus on routing decisions, odd-lot handling, U.S. Treasury securities and options.
- Disclosure of Order Routing Information. FINRA will review firms’ compliance with the amended Regulation National Market System (NMS) Rule 606 which requires broker-dealers to provide new customer-specific reports for not held orders in NMS stocks.
- Vendor Display Rule. FINRA will evaluate the adequacy of firms’ controls and supervisory systems to provide their customers with the current consolidated national best bid or offer as required by Rule 603 of Regulation NMS.
- Digital Assets. Digital assets raise novel and complex regulatory issues under federal securities laws and regulations, as well as FINRA rules. FINRA continues to work closed with the SEC to understand firms’ business plans and determine how securities laws apply to those plans. In July 2019, SEC and FINRA staff released a joint statement addressing certain non-custodial services, as well as challenges related to custody and critical Exchange Act Rule 15c3-3 obligations for digital assets.
- Liquidity Management. FINRA will focus on areas addressed in Regulatory Notice 15-33 (Guidance on Liquidity Risk Management Practices), as well as those that may create challenges for clearing and carrying firms’ contingency funding plans.
- London Interbank Offered Rate (LIBOR) Transition. FINRA will engage with firms—outside of the examination program—to understand how the industry is preparing for LIBOR’s retirement at the end of 2021, focusing on firms’ exposure to LIBOR-linked financial products; steps firms are taking to plan for the transition away from LIBOR to alternative rates, such as the secured overnight financing rate (SOFR); and the impact of the LIBOR phase-out on customers.
- Ongoing Obligations. FINRA will continue to assess firms’ supervisory controls relating to Exchange Act Rule 10b-10 and FINRA Rule 2232 and compliance with FINRA Rule 3310.
- Cyber Security. FINRA will thoroughly assess whether firms’ policies and procedures are reasonably designed to protect customer records and information consistent with Regulation S-P Rule 30 as it pertains to their business model and scale of operations.
- Technology Governance. Firms’ increasing reliance on technology for many aspects of their customer-facing activities, trading, operations, back-office and compliance programs creates a variety of potential benefits, but also exposes firms to technology-related compliance and other risks including operational failures that may compromise firms’ ability to comply with a range of rules and regulations, including FINRA Rules 4370, 3110, and 4511, as well as Exchange Act Rules 17a-3 and 17a-4.
For further information, you can find the entire report including the list of practical considerations and additional resources provided by FINRA here.