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FINRA Exam Priorities 2018

2018 FINRA Exam Priorities Letter

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.

FINRA Exam Priorities 2018

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.

View the FINRA Exam and Regulatory priorities for 2018 here

RND Resources, Inc. specializes in vertically integrated compliance programs for broker-dealer, RIA, and private fund offices. Our highly trained staff provides outsourced on-going compliance, FINOP, procedures manuals, and audit assistance on an as needed, interim, or monthly basis. We handle everything from the most complex situations and business models to small offices needing outsourced support. Visit RND services for more information about how we can assist your business; or call (818) 657-0288.

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The rise in regulatory fines

How FINRA compliance consultants ease enforcement action outcome

Regulator examiners are focused on deterring fraud and uncovering supervisory failures, but aren’t expected to draft tailored compliance programs and procedures for a firm. Firms that need this type of assistance reach out to qualified FINRA compliance consultants for guidance. Additionally, FINRA experts are often called upon by either firms or regulators to supervise remediation efforts and monitor on-going compliance activities.

Benefit of hiring a FINRA consultant to assist in remediation

FINRA compliance consultants improve enforcementOne of the benefits of on-boarding a compliance consultant to resolve a violation is having them communicate directly with the regulatory examiner. A consultant with appropriate credentials, such as a General Securities Principal Series 24, can directly communicate procedural changes to enforcement examiners while providing an added sense of relief to the firm’s managing members and confidence for the regulator. Additionally, if new business practices are recommended, the business owner may benefit from better devised solutions through an expert in compliance, rather than an examiner who’s focus is limited to regulation and not hands-on compliance supervision.

Regulators realize they get a benefit from member firms who employ FINRA or SEC consultants in resolving their remediation concerns and value the partnership. Regulation consultants have expertise that extends beyond resources of regulators, which increases examiner confidence. Use of a compliance expert often demonstrates to regulators that the firm takes the violation seriously and is committed to improving. Most firms find, outsourcing to a compliance firm outweighs the cost by getting matters settled sooner and with less frustration. Managing partners also benefit by eliminating uncertainty in interaction with the examiner, so they can focus on assuring clients and helping the business recover from negative press or otherwise.

In some instances, a regulator will require a compliance expert for remediation and on-going monitoring. Settlement may include reviewing transactions, determining whether responsibility lies upon officers or employees, and uncovering additional victims.  Delegating this responsibility onto the compliance consultant does not come lightly. Regulators will seek complete independence between the parties. Restrictions of working together in the past and/or future will be part of the agreement; to ensure conflicts of interest are eliminated.

It’s possible the compliance firm may be asked to enforce the necessary settlement reparations. They may take on the responsibility to calculate and release agreed disbursements for the firm. This gives the regulator confidence the settlement shall be paid under the terms of the enforcement agreement. In such cases, the compliance firm is generally required to submit a report to the regulator showing proof of activities on a scheduled basis. By assigning these tasks to a compliance consultant the regulator can move on to other cases needing attention without the work of verifying receipts or calculating damages. When a mandated restitution is expected to be resolved over several months or a few years, outsourcing to a consultant can significantly shift the burden away from examiners and make life for the firm easier as well.

In some cases, regulators run a risk by mandating support from a outsourced compliance expert. Compliance consultants look at policy and procedure compliance from a perspective that differs from the view of examiners. Occasionally a compliance professional will interpret the degree of egregiousness different than the examiner. The compliance professional may assert the examiner was too strict in applying the rule, or even too broad. These types of discrepancies may delay resolution of an enforcement case until resolved. Therefore, it is important to work with a compliance consulting firm with strong experience in enforcement matters that knows how to demonstrate their own assessment clearly to regulators if necessary.  A seasoned compliance professional may even be able to draw a conclusion that sanctions imposed by the regulator are disproportionate to the level of misconduct. In this type of situation, it is important to have a solid team of compliance professionals advising your firm before coming to a resolution agreement.

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Does your FINRA, MSRB, or SEC member firm need assistance navigating remediation for an enforcement action or exam? Our professionals are highly experienced with regulatory rules. We develop policy and procedure manuals for Broker-Dealers, RIAs, Municipal Brokers, Private fund managers, and more. Our expertise is vertically integrated compliance solutions for firms; bringing business planning, operations, trading, and registration. RND professionals provide –

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FINRA Compliance

Developing a Successful Compliance Platform

Executives and compliance officers of smaller brokerage firms are burdened with regulatory controls that shift their time and focus away from developing products, services, and clients, to working tirelessly at staying on top of rule changes and compliance requirements. With all the time spent simply staying on top of changes and meeting requirements, it’s difficult to strategize and develop a program that compliments and benefits the business. In developing a strong compliance program, determine –  

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Sentry Software for Compliance Management

All Compliance Consulting and Regulatory Support Firms are Not the Same

 

RND Resources, Inc. works hard to prove that compliance can run more efficiently by automating and integrating processes. Doing so, allows firms to grow without being held back by compliance capability restrictions.

      Part of the work we do at RND includes supporting small independent firms or providing compliance partners expertise on a specific matter. We’re able to do this because we have a team of veteran FINRA specialists and FINRA experienced examiners who work closely to identify customized solutions. We find outside of the box solutions that allow firms to prosper and grow without being held back by regulatory demands.

 

Sentry Software for Compliance Management      Some clients have in-house compliance departments that are over-whelmed with too many reviews and procedure or policy changes. They have a difficult time keeping up the workload. Unable to respond and quickly handle the needs of the firm, they hold the firm back from growth strategy.  In this case RND Resources is able to provide much needed support and guidance. So, the limitations of the compliance department are no longer a limiting factor to the firm’s success. Our services are scalable. We grow with each firm, keeping them in focus and up to date at all times. At the same time, our experts provide the guidance needed to successfully introduce and manage new program offers.

 

      To further improve our commitment to efficiency and transparency we’ve added Sentry, a software-as-a-service, for our clients. Sentry provides clients with access to our proprietary checklists and processes in a seamless, integrated, software solution.  By combining Sentry with our support team, firms are given greater flexibility to track regulatory data and run up-to-the-minute audits.  Improved response rate and accuracy are just a few of the benefits of the Sentry solution.

Read more about Sentry: www.finracompliance.com/sentry