FINRA Examination Priorities 2016

FINRA 2016 Regulatory and Examination priorities letter identifies new areas of focus as well as recurring concerns. While the FINRA examination letter this year re-iterates much of what is on the 2016 SEC priorities letter, there are a few extras.   Compliance Performance

Supervisory, risk management, and controls are always high on the exam list. Cyber-security has been taking a front seat in risk examinations, and AML monitoring is target. FINRA also relays concerns of liquidity management, especially with HFTs impacted by market fluctuations. 


Culture, Ethics, and Conflicts of Interest

FINRA asserts a firms’ culture is defined by its supervisory system, including the approach to identifying and managing conflicts of interest and ethical treatment of customers. Thus, for 2016 FINRA’s focus on firm culture is closely related to supervision.  

4 Key Areas

FINRA indicates examinations will consider 4 key areas where they have observed continuing concerns: Managing Conflicts of Interest, Technology, Outsourcing, Anti-Money Laundering (AML).  

With regards to Conflicts of Interest, FINRA examiners will likely take into consideration targeted examinations of 2015 that encompass; incentive structures, research business lines, information leakage, and position valuation.

Technology has been a key area of concern in supervision and risk management. Technology infrastructure risks include hardware, software, and IT personnel. Failures can have devastating for firms and investors. Because the risk rate is considered high, FINRA will focus on firm supervision and management of cyber-security, data quality, and governance. In February 2015 FINRA released its Cyber-Security guidebook. Firms concerned about Cybersecurity should consult the guide and verify they are taking all precautions available for thwarting off attacks or breach of data integrity.

Outsourcing provides a strategic advantage for firms looking to reduce costs of hiring key employees and operational staff. Many firms find outsourcing to a qualified compliance consulting and support firm provides a scalable solution with broad expertise and lower audit costs due to efficiencies. FINRA reminds firms outsourcing is not a means to absolve firms of their responsibility to supervise activities for compliance with securities regulations. The ultimate burden of responsibility remains on the broker-dealer. Firms are advised to seek reputable outsourcing partnerships and to appropriately supervise outsourced activities and ensure adequate controls are in place for managing risk.

AML Controls are categorized under 2 essential areas; (1) Suspicious Activity Monitoring, (2) MicroCap Securities. Adequate suspicious activity monitoring examinations will likely include a firms’ surveillance of money movements and trading activity. Routine system tests should be conducted by firms to ensure the accuracy of data for all types of accounts, with particular attention to high risk activities. If certain types of transactions are excluded from AML surveillance, be prepared with supporting documentation.  

Equally important, FINRA remains focused on high-risk activity involving microcap securities, suggesting firms conduct due diligence to ensure compliance and registration. Expect examination of processes in place that identifies suspicious trading activity, “red flags”, “pump-and-dump” schemes. Firms should focus on manipulative trading activities particularly of thinly traded securities.

Liquidity Concerns

Failure to manage liquidity can quickly result in firm failures and systematic crisis. FINRA is expected to review firms’ contingency funding plans in view of their business model. Contingency plans will be examined for their efficiency in providing liquidity under stress, with stress tests and other reviews to evaluate effectiveness.  High-Frequency Trade firms (HFT) will be given particular focus given the high rate of orders and sudden changes in execution which can create liquidity challenges for these firms.

> Read more: FINRA 2016 Examination Priorities Letter

>  Read more: SEC 2016 Examination Priorities Letter

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