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FINRA Releases 2018 Exam Priorities for 2018

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  • Posted on: Jan 26 2018

The Financial Industry Regulatory Authority (“FINRA”) recently released its 2018 Regulatory and Examination Priorities Letter (the “Priorities Letter”) (here). [A copy of the announcement can be found here.] The Priorities Letter identifies the areas that FINRA intends to focus on in the coming year.

“The coming year will bring both continuity and change in FINRA’s programs,” FINRA President and CEO, Robert Cook (“Cook”), wrote in a note accompanying the letter.

FINRA’S 2018 Priorities at a Glance

The Priorities Letter describes areas that are designed to improve the compliance, supervisory and risk management procedures of member firms. Similar to the self-regulatory organization’s priorities in 2017, retail fraud and high-risk brokers top the list.

“Fraud is always a major area of focus for FINRA,” said Cook. Noting that FINRA “made hundreds of referrals to the U.S. Securities and Exchange Commission (SEC) for potential insider trading and other fraudulent activities involving individuals or entities outside FINRA’s jurisdiction,” Cook said that the self-regulator “will continue to pursue our investigations in these areas aggressively.”

“[A] top priority for FINRA” in the coming year, will be “identifying high-risk firms and individual brokers and mitigating the potential risks that they can pose to investors.” In particular, there will be an emphasis on broker recommendations to unsophisticated, vulnerable investors – particularly the elderly. For example, FINRA intends to “focus on recommendations for speculative or complex products by high-risk brokers to investors who may not have the necessary sophistication, experience or investment objectives.” The self-regulatory organization “will also review situations where registered representatives have control of investors’ finances as power-of-attorney or trustee on customer accounts, or have future rights to customer assets as a named beneficiary on customer accounts.” [This Blog has written about FINRA’s efforts to protect senior investors from financial exploitation by member firms here and here.]

Protection of customer assets and the accuracy of member firms’ financial data also will be a FINRA priority.

According to the Priorities Letter, “FINRA will continue to focus on firms’ liquidity planning, compare strengths and weaknesses across firms’ liquidity plans and share effective practices.” In particular, “FINRA will evaluate whether a firm’s liquidity planning is appropriate for the firm’s business and customers, and whether it includes scenarios that are consistent with its collateral resources and client activity.”

FINRA will continue its efforts to stop bad actors, promote fair and transparent sales practices, and identify and halt abusive market activities. The self-regulator will focus on high-risk brokers with new rulemaking initiatives and examinations. In addition, other areas of focus will be on operation and financial risks, particularly technology governance and cybersecurity, as well as market regulation, the protection of which Cook stated “must remain a top priority for firms.”

Cook also noted that the Priorities Letter, coupled with FINRA’s 2017 Examination Findings Report (here), “serves as a resource for broker-dealers to enhance their compliance, supervisory and risk management programs and to prepare for their FINRA examination.” [This Blog wrote about FINRA’s 2017 priorities letter here.]

The self-regulator also plans to roll out a revamped exam program. FINRA will implement a risk-based framework aimed at aligning exam resources with the risk profiles of member firms. In this regard, FINRA plans to add or enhance information sharing measures during exams as well as to improve examiner training. Above all, FINRA will continue to work to ensure market integrity, including best execution, protection against manipulation across markets and products, and fixed income data integrity.

The Takeaway

Although FINRA’s mission will continue to be protecting investors and promoting market integrity, there will be changes in how FINRA accomplishes its mission. In this regard, there will be ongoing changes to the structure of FINRA’s advisory committee, based on input from member participants. The effectiveness of these changes and priorities remain to be seen. As noted by the self-regulatory organization, “FINRA will update its view on risks throughout the year, as well as provide observations on both concerns and effective practices relevant to some of these areas.”

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