For FINRA member firms, the regulator’s annual examination priorities letter provides guidance and insight firms can use to check their preparedness to weather an examination. In its 2020 Risk Monitoring and Exam Priorities Letter, FINRA identified several focus areas for the coming year, including both new and familiar topics.
There are several new priorities FINRA intends to incorporate into its 2020 exam cycle, including Reg BI and Form CRS, communications with the public, and cash management and bank sweep programs.
Regulation Best Interest (Reg BI) and Form CRS (Client Relationship Summary)
Reg BI, the best interest standard for broker-dealers’ and associated persons’ recommendations to retail investors, takes effect June 30, 2020. If your firm is examined during the first half of 2020, expect FINRA to focus on your preparedness to meet the requirements of the rule.
For firms visited by FINRA after June 30, the regulator will examine the adequacy of procedures and training, whether the firm is implementing a best interest standard, whether recommendations to retail clients are made with care, skill, and costs, whether reasonably available alternatives are considered, the firm’s safeguards against excessive trading, how the firm is handling Reg BI disclosure requirements, the provision of Form CRS to clients, and supervision.
Communication with the Public
While communication with the public is a perennial exam favorite, FINRA indicated that in 2020, it intends to focus on communications related to retail private placement transactions, as well as to firms’ use of digital communications channels to correspond with clients and prospects.
- Private Placement Retail Communications. FINRA will review processes, policies, and procedures for the review, approval, supervision, and distribution of communications aimed at retail investors regarding private placement securities.
- Digital Communications. Firms’ reliance on, and use of, digital communications and social media to communicate with clients is on the rise. In its 2020 exams, FINRA will evaluate how firms are using, supervising, and retaining such communications.
Cash Management and Bank Sweep Programs
In its exam priorities letter, FINRA identified potential concerns with cash management services and sweep programs for affiliated mutual funds or bank funds. In 2020, firm examinations will include reviews of documentation and disclosure, including alternative options available to investors and the risks inherent with such funds and programs.
This year’s exam letter also includes several focus areas firms will likely recognize from previous years’ letters, including the following:
- Cybersecurity. As the risk of cyber attacks is ever-present, FINRA will review firm’s policies and procedures to assess their effectiveness at protecting customer information.
- Best Execution. If your firm is examined in 2020, FINRA will focus on potential conflicts of interest in order routing, odd-lot activity, policies and procedures related to treasury securities, best execution for options, and disclosures.
- Sales Practice Risks and Supervision. Sales practices and supervision are always included in FINRA examinations. In 2020, firms should be prepared to demonstrate their efforts related to trading authorization, complex products, private placements, variable annuities, as well as risk mitigation and supervision related to senior investors.
- Digital Assets and Cryptocurrency. As interest in cryptocurrency on the part of both investors and firms continues to grow, FINRA will again focus efforts on reviewing firms’ CMA filings, marketing materials, and disclosures.
- Regulatory Technology. As firms’ reliance on technology increases, FINRA will seek to evaluate the effectiveness of firms’ systems, including how well such systems help firms manage their regulatory obligations and how effective the systems are at protecting investors’ information.
Is Your Firm Prepared for a FINRA Exam in 2020?
While the annual exam priorities list can be a helpful tool for firms, it is important to remember that the list is not intended to be comprehensive. When FINRA examines registrants this year, it will look at information and address perceived concerns in other areas as well. Still, compliance officers can check their firms’ compliance efforts against the priorities identified, using the letter to bolster efforts in the listed focus areas.
Please note that the review areas identified in this blog post are not all-inclusive; FINRA member firms are encouraged to review FINRA’s letter in its entirety to identify any other identified focus areas that may be applicable, given the firm’s products and service offerings.
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