While the FINRA Exam Priorities letter will not be nominated for the Man Booker award or a Pulitzer, it should at least get credit for consistency. There are the recurring themes one would expect to find in any string of sequels (Fraud, AML, Liquidity, Suitability, Market Manipulation), the introduction of predictably new characters to keep things fresh (Initial Coin Offerings, Cryptocurrency, Technology Governance), and, to keep the audience riveted, something out of left field (Alternative Trading Systems). Lest anyone accuse FINRA of being slothful, a section of New Rules acts as the denouement.
While not exactly prose, the Exam Priorities Letter weaves a tale of retail protection, touching upon the motif in 12 out of 20 priorities. Almost as a sub-plot, Market Integrity has its own highlights. Finally, making a cameo appearance, Business Continuity Plans received a well-deserved mention considering the significant disruption last year’s hurricane season caused.
And without further ado, the FINRA Priorities:
Fraud – how could this not be the lead priority? Like whack-a-mole, no sooner does one disappear and another reappears.
High-risk Firms and Brokers – Slightly modified and expanded from last year, FINRA warned firms that hire recidivist brokers to beware and the net is being cast beyond just the offending brokers this year.
Business Continuity Planning – BCPs can be a useful document from a business standpoint. As Hurricane Harvey demonstrated though, if you wait until the crisis is upon you, it does not do much good.
Customer Protection and Verification of Assets and Liabilities – As soon as we see “15c3…” we tend to go looking for the FINOP. As we have noted before, the FINOP can be an integral part of planning, not just damage control.
Technology Governance – While no rule exists with this title, how a firm addresses its technology in connection with compliance is of increasing concern. We are hearing questions and seeing plenty of notes being taken while answering these questions from regulators.
Cybersecurity – If you are not aware of this as a legitimate risk to your business, let alone your compliance program, you are asking for increased scrutiny from the regulators.
AML – Same mantra: policies and procedures, resources, independent testing. You have been warned.
Liquidity Risk – This is more the realm of larger firms and firms that use leverage and is consistent with the concern of retail investors finding out too late that the firm they trusted is not trustworthy. This also compliments the BCP priority. If you have potential liquidity risk, it should be addressed and tested in conjunction with the BCP.
Short Sales – This year, FINRA is identifying how customers are charged for the borrow.
Suitability – What priorities letter would not be complete without “Suitability?” Among other suitability concerns, we have observed FINRA looking into the process and supervision of moving accounts to and from commission to fee based accounts (for dual BD/IA firms).
Initial Coin Offerings and Cryptocurrencies – FINRA (and other regulators) has not been bashful about its skepticism regarding ICOs and Cryptocurrencies. Be ready for heightened scrutiny if your firm engages in these activities. Also be on the lookout for continued guidance from FINRA, the SEC, the Treasury, and state regulators.
Use of Margin – Make sure risks are disclosed to customers.
Securities Backed Lines of Credit (SBLOC) – Like any good regulator, they are chaperoning the punch bowl just as the party is getting started.
Manipulation – Anything that threatens the integrity of the market will bring the watchful eye of FINRA.
Best Execution – Big brother is watching you and they just admitted it. If your firm has what could be perceived as conflicts regarding order execution, be ready to explain how those conflicts are mitigated.
Regulation SHO – Relying on a third party is not enough. Be prepared to show that testing has been done to adhere to the rule and that any exemptions truly are exemptions.
Fixed Income Data Integrity – This appears that it will mostly be done in the background by viewing TRACE submissions and will now include Treasury securities. This will be a case of no news is good news.
Options – If you are going to take advantage of MNPI, might as well do it efficiently. FINRA is surveilling option activity electronically. It will be easier to detect what nefarious activity clients are up to. It may also bring up false positives. You should be able to demonstrate that your supervision of options trading is as robust as FINRAs.
Market Access – 15c3-5: know if this applies to you. Read the rule or ask your consultant.
Alternative Trading Systems (ATS) – Given the limited number of registered ATS, this will not have much bearing on firms that do not operate an ATS.
Report Cards – Welcome back to high school only without the grade inflation, possibly even grade deflation.
Admittedly, it can be tempting to read the final chapter of a page turner without going through the entire plot development. In this case, though, one can hope that the 2018 Exam Priorities Letter is more of a life insurance policy, better off not needed.
https://www.ncsregcomp.com/team/stephen-murphy/