The 2018 FINRA Exam Priorities letter – and a new approach
In January of each year FINRA releases a priorities letter based on exam findings from the previous year. The letter helps firms improve compliance programs and build integrity for investor markets. This year is exciting because in January 2017 FINRA launched an evaluation of its effectiveness and goal as a self-regulating organization. Early in 2017 the initiative called FINRA360 sparked an introspective approach to the regulators effectiveness in protecting investors, overseeing the investor market, and supporting strong capital markets. This years letter will help broker-dealers clarify the scope and direction of FINRA based on organizational changes and new goals of the SRO.
The priorities report has been used by compliance teams and executives in steering their compliance, supervisory, and risk management programs in the coming year and beyond. This years’ exam priorities letter once again identifies areas of interest based on past examinations conducted by the regulator and overall market observations.
2018 FINRA Exam Priorities:
Fraud – activities such as insider trading, microcap pump-and-dump schemes, issuer fraud, and Ponzi schemes. Exam priorities suggest a close look at schemes that victimize vulnerable investors and seniors. New rules have been added (Rule 2165 and Rule 4512) which provide additional tools to protect seniors. FINRA reminds firms of their obligation to file SAR’s (Suspicious Activity Reports), and is stepping up to refer fraudulent activities outside their purview to the SEC.
High-Risk Firms & Brokers – FINRA’s mission is protecting investors and standardizing investor market regulation. Bad actors seek to evade regulatory requirements and take advantage of investors; creating undue risk for everyone. To this end FINRA seeks to promote effective compliance standards while maintaining equality between small and large broker-dealers by enhancing transparency and access to information. The exam report suggests a focus on hiring and supervisory practices of high-risk brokers, including inspection of tailored compliance programs.
Operational and Financial Risks – Business Continuity Planning (BCP’s) and disaster recovery; Consumer assets protection; Technology management policy and procedures; Cybersecurity protocols; effectiveness of Anti-Money Laundering (AML) programs; Liquidity risk plans.
Sales Practices – adequacy of Suitability controls; Crypto-currency and Coin offering (ICO’s) mechanisms and controls; Margin transactions; Securities backed lines of credit (SBLOC).
Investor Market Integrity – surveillance of Manipulation tactics; Best Execution surveillance; compliance with Rule 201 of Regulation SHO; Fixed Income Data Integrity and reporting through TRACE; Option products and related violations; Market Access and pre-trade financial controls of SEA Rule 15c3-5; Alternative Trading System supervision. FINRA announces launching a “Report Card” system in 2018 which will provide firms with insight into how well they are meeting standards.
New Rules are scheduled for release in 2018, and FINRA encourages firms to begin considering how these will be integrated with compliance, risk, and supervisory programs. Highlighted rules focus on protecting vulnerable or exploited investors; Customer Due Diligence and FinCEN reporting; Customer Confirmations; and Consolidated Registration Rules.
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