In its annual letter announcing its risk monitoring and examination priorities for the coming year, FINRA identified both new priorities and ongoing concerns. However, FINRA chose to use the 2019 priorities letter to highlight new areas of focus, those it hadn’t previously articulated – including RegTech (regulatory technology) solutions FINRA member firms rely on to meet their compliance obligations.
A Focus on Regulatory Technology
FINRA signified its intention to focus on how firms are using RegTech solutions to meet compliance obligations. The regulator states it will work closely with firms to understand and evaluate how RegTech platforms help firms meet risks related to:
- Supervision and governance
- Third-party vendor management
- Safeguarding customer data
Partnering with the right vendor for RegTech solutions matters today, more than ever before. Using state-of-the-art RegTech solutions can help firms meet their regulatory compliance obligations, addressing many of this year’s highlighted examination priorities identified below.
Firms using solutions designed to automate and monitor outside business activities, personal investment transactions, best execution, and more can be confident in their ability to satisfy FINRA’s inquiries about their RegTech platforms.
New and Enhanced Focus Areas for 2019
In addition to an increased interest in RegTech, some of the key areas highlighted in FINRA’s 2019 priorities letter are familiar standbys such as suitability and best execution. Others are new to the list or indicate a shift in focus.
- Online Distribution Platforms. Some member firms may not be correctly identifying and monitoring their sales activities when it comes to securities offered through online distribution platforms. FINRA indicated its intention to focus on suitability, communications with the public, AML, compensation structures, and more for firms involved in such distribution channels.
- Suitability. FINRA plans to evaluate the adequacy of firms’ quantitative suitability determinations and controls, exchange-traded product suitability, over-concentrations in illiquid securities, sales to senior citizens, and whether recommendations that customers purchase specific mutual fund share classes are suitable.
- Outside Business Activities and Private Securities Transactions. Employees’ outside business activities, including “selling away,” pose risks to firms and customers. In addition to a continued focus on OBAs and private transactions generally, FINRA examiners will also focus on whether associated persons are raising funds or capital for entities whose names are similar enough to established issuers as to cause confusion.
- Suspicious Activity Reviews. FinCEN’s Customer Due Diligence (CDD) rule took effect on May 11, 2018. In 2019 firm examinations, FINRA will review how firms are identifying beneficial owners, whether the systems used to make such determinations present data integrity risks, and how firms monitor and evaluate system effectiveness.
- Best Execution. FINRA intends to focus best execution reviews this year on firms who direct substantially all of its customer orders to affiliated broker-dealers or a small number of wholesale market makers. Firms must be able to demonstrate how they quantify the benefits customers realize from using particular broker-dealers and how conflicts of interest are identified and addressed.
FINRA also indicated that it will focus on market access, short sales, and short tenders, as well as financial risks including credit risk, and funding and liquidity issues.
Of course, firms should not focus solely on new examination priorities when evaluating the effectiveness of their compliance programs or RegTech solutions. Instead, review your firm’s risk matrix and controls to ensure you have identified and addressed each of these focus areas appropriately. With FINRA’s stated focus on RegTech solutions this year, now is the time to evaluate whether your current systems and solutions are effectively meeting your firm’s needs.