Broker-dealers started the new year with a roadmap from the Financial Industry Regulatory Authority on what to expect during exams, as well as new rules that they’ll be expected to comply with this year.
Priorities laid out in the FINRA’s newly released 2018 Regulatory and Examination Priorities Letter include drilling down on retail fraud and high-risk brokers, with the self-regulator also planning to usher in a revamped exam program in 2018 and enhanced “information-sharing” with firms during exams.
“The coming year will bring both continuity and change in FINRA’s programs,” CEO Robert Cook wrote in a note to firms that accompanied the Priorities Letter.
“The continuity comes, first and foremost, in our unwavering commitment to our mission: protecting investors and promoting market integrity in a manner that facilitates vibrant capital markets,” Cook explained. “Change will come in how we accomplish that mission.”
FINRA’s regulatory chief, Susan Axelrod, told Investment Advisor that while there’s not “one big-bang” item in the priorities, the report includes a “number of changes that [Cook] has talked about — training examiners, getting more information to the industry through the first-ever exam findings report.”
FINRA’s “risk-based exam focus will be front and center” and “will continue to evolve” under Cook, said Axelrod, who now serves as senior advisor to the CEO (and plans to leave her post at FINRA in April).
Besides high-risk firms and rogue brokers, operational and financial risks — including technology governance and cybersecurity — and market regulation will be areas of focus. “Tech governance and cybersecurity are areas of focus for [self-regulatory organizations]; the real issue is getting people on the ground to actually understand” those issues, Axelrod explained.
An important focus of the report, Axelrod continued, is firms’ business continuity plans. Considering the hurricanes that hit Houston and Puerto Rico last year, “are firms prepared” for such events? “The unanticipated challenges” for these areas was the length of time that power was out, Axelrod said. FINRA wants to ensure firms’ continuity plans can “evolve into long-term plans.”
Other important priority areas for FINRA in 2018 include: sales practice risks, including recommendations of complex products to unsophisticated, vulnerable investors; protection of customer assets and the accuracy of firms’ financial data; and market integrity, including best execution, manipulation across markets and products, and fixed income data integrity.
Cook noted that the exam priorities letter — alongside FINRA’s 2017 Examination Findings Report — “serves as a resource for broker-dealers to enhance their compliance, supervisory and risk management programs and to prepare for their FINRA examination.”
On tap for this year are “additional changes to improve our examination program as we continue to implement a risk-based framework designed to better align examination resources to the risk profile of our member firms,” Cook said.
Among other measures, FINRA plans “to add or strengthen measures to increase information sharing with firms during examinations, improve processes for making examination information requests and enhance training of examiners,” he added.
Work also continues on other FINRA360 initiatives. For example, FINRA is working on additional responses to comments received on its Special Notice on Engagement, according to the regulatory organization’s CEO.
As to the first-ever exam findings report, released Dec. 6, FINRA welcomes comments on it “and how it can be made more useful,” Cook said.
FINRA, he added, also recently took steps to make its Advisory Committees more transparent, “and we will be announcing further changes to our Advisory Committees in the coming weeks.”
As to upcoming new rule deadlines, FINRA reminded firms of the following upcoming compliance dates:
Financial Exploitation of Specified Adults: FINRA Rule 2165 will become effective Feb. 5, and permits members to place temporary holds on disbursements of funds or securities from the accounts of specified customers where there is a reasonable belief of financial exploitation of these customers.
Amendments to FINRA Rule 4512 (Customer Account Information): An amendment to FINRA Rule 4512 requires members to make reasonable efforts to obtain the name of and contact information for a trusted contact person for a non-institutional customer’s account. The amendment will become effective Feb. 5.
The Financial Crimes Enforcement Network’s (FinCEN) Customer Due Diligence Rule (CDD Rule): Firms have until May 11 to comply with FinCEN’s CDD Rule. FinCEN issued the CDD Rule to clarify and strengthen customer due diligence for covered financial institutions, including broker-dealers.
In the CDD Rule, FinCEN identifies four components of customer due diligence: (1) customer identification and verification; (2) beneficial ownership identification and verification; (3) understanding the nature and purpose of customer relationships; and (4) ongoing monitoring for reporting suspicious transactions and, on a risk basis, maintaining and updating customer information.
Amendments to FINRA Rule 2232 (Customer Confirmations): The amended FINRA Rule 2232 requires a member to disclose the amount of markup or markdown it applies to trades with retail customers in corporate or agency debt securities if the member also executes offsetting principal trades in the same security on the same trading day.