Be Prepared for Annual Certifications

FINRA member firms, take note: the regulator recently released its 2018 Regulatory and Examination Priorities Letter. This annual publication is designed to highlight areas FINRA intends to focus on over the course of the coming year.

What Will FINRA Examiners Look For in 2018?

Key stated priorities include fraud, high-risk firms and brokers, operational and financial risks, sales practice risks, market integrity, and several new FINRA rules scheduled to take effect in 2018.


1. Continued Focus on Fraud

FINRA continues to combat fraudulent activities, such as Ponzi schemes, insider trading and fraudulent schemes targeting senior investors. Taking an aggressive stance on microcap “pump-and-dump” schemes, FINRA is urging firms to monitor brokers’ activity in microcap stocks and evaluate internal policies and procedures to ensure they are designed to prevent, detect and correct fraudulent activity.


2. Mitigating Risks Posed by High-Risk Firms and Brokers

In 2017, FINRA emphasized the need for firms to have appropriate hiring and supervisory policies in place for high-risk brokers, and to implement heightened supervisory procedures where appropriate. Building on that work, the regulator intends to continue to focus on high-risk firms and brokers, including situations that pose potential conflicts of interest for registered representatives.

Firms should also ensure their policies around outside business activities and selling away are up-to-date and allow the compliance department to accurately identify and address potential issues.


3. Firms’ Operational and Financial Risks

While investor-focused activities rightfully receive a lot of attention, FINRA’s priorities letter also reminds firms that their back-office operational and financial policies and procedures must also meet regulatory compliance requirements. In addition to perennial priorities like firms’ net capital, reserve computations, AML programs, and liquidity risk, FINRA will be focusing on business continuity and technology.

2017’s hurricanes and wildfires underscored the need for firms to have actionable business continuity plans, so firms should anticipate being asked to demonstrate their ability to restore systems and procedures in the event of a significant business disruption.

Technology change management and preparedness to handle cybersecurity threats will also be areas of focus for FINRA this year.


4. Risks Tied to Sales Practices

Suitability of recommendations has long been a focus area for FINRA. In addition to product vetting and firms’ supervisory controls, FINRA intends to look closely at situations involving complex products and unsophisticated investors.

Digital assets, margin accounts, securities backed lines of credit, IRA rollover recommendations, and recommendations to switch from traditional brokerage accounts to fee-based accounts will also be reviewed carefully in FINRA’s 2018 member firm examinations.


5. Monitoring the Integrity of Securities Markets

FINRA’s 2018 priorities letter also includes an emphasis on ensuring – and maintaining – the integrity of securities markets. The SRO leverages a variety of technology tools to do so, using machine learning techniques and automated surveillance programs to detect market manipulation.

Best execution is a focus area again this year, with an examination sweep currently underway (initiated in November 2017.) Firms must also ensure their Regulation SHO policies and processes are working properly, that fixed income data integrity is maintained, and will look more closely at potential options-related violations.

Broker-dealers selected for examination in 2018 must also be prepared to demonstrate compliance with SEA Rule 15c3-5 (Market Access Rule), requiring pre-trade financial controls.


6. New Report Cards in 2018

Member firms should expect to receive three new report cards from FINRA in 2018: Auto Execution Manipulation Report Card, Alternative Trading System Cross Manipulation Report Card, and Fixed Income Mark-up Report Card.

During examinations in 2018, FINRA will evaluate how, and to what extent, firms are using these new tools to further compliance efforts.


7. Six New Rules

Finally, this year’s priorities letter also identified six new rules scheduled to take effect in 2018, and indicated that FINRA may review these with firms to ascertain to what extent firms are taking action to implement their new obligations.


Review Compliance Program, Systems and Tools

This list of focus areas, together with the 2017 Report on FINRA Examination Findings, should help FINRA-member firms identify strengths and potential weaknesses in their compliance programs.

Of course, FINRA’s examination priorities letter should simply be viewed as a guide – one that is not comprehensive or guaranteed. Still, reviewing your firm’s compliance programs and policies against the list of stated focus areas can help you put your best foot forward if your firm is selected for examination this year.


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