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Regulation and Compliance > Federal Regulation > FINRA

FINRA Releases 2019 Exam Priorities

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The Financial Industry Regulatory Authority released Tuesday its risk monitoring and exam priorities for 2019 — highlighting new priorities as well as ongoing issues like cybersecurity and firms’ hiring of brokers with former infractions.

As Robert Cook, FINRA’s CEO, noted to broker-dealers, the 2019 priorities letter “takes a new approach by highlighting those topics that will be materially new areas of focus for our risk monitoring and examination programs in the coming year.”

The emerging issues of focus are:

  • online distribution platforms;
  • firms’ compliance with the Financial Crimes Enforcement Network’s Customer Due Diligence (CDD) rule; and
  • firms’ compliance with their markup or markdown disclosure obligations on fixed income transactions with customers.

While the broker-dealer self-regulator “will continue to review and examine for longstanding priorities discussed in greater detail in past letters, we agree with the suggestion from many of our member firms that a sharper focus on emerging issues will help them better determine whether those issues are relevant to their businesses and how they should be addressed,” Cook stated.

Broker-dealers should also expect an ongoing review of their firms’ compliance in areas of focus identified in prior years, which include:

  • hiring and supervision of associated persons with a problematic regulatory history;
  • cybersecurity; and
  • fraud, insider trading and manipulation across markets and products.

Brian Rubin, partner at Eversheds-Sutherland in Washington, said that “It’s great that [FINRA is] no longer using the ‘everything but the kitchen sink’ approach” to exams. “Having more focus, and in particular, highlighting new areas will certainly help the industry.”

As to highlighting “market manipulation,” Rubin added, “firms engaged in fraud like market manipulation are unlikely to read FINRA‘s priorities letter.”

Cook stated in his letter to broker-dealers that as the new title of the letter reflects, FINRA has “broadened the scope of the letter to more explicitly include our priorities for risk monitoring.”

Risk monitoring, he explained, is the ongoing process through which FINRA monitors developments at firms and across the securities industry “to identify risks and assess their prevalence and impact. We use this analysis to evaluate whether a regulatory response is appropriate, determine what that response should be and then allocate the required resources to implement the response.”

As to broker-dealers’ compliance with FinCEN’s CDD rule, FINRA’s rule to amend its Capital Acquisition Broker (CAB) rule, Rule 331, kicked in on Nov. 19.

The rule was updated to reflect the adoption by FinCEN, a bureau of the Treasury, of a final rule on customer due diligence requirements for financial institutions.

The broker-dealer self-regulator announced in its Regulatory Notice 18-36, issued in November, that it has filed for “immediate effectiveness amendments” to CAB Rule 331 — its anti-money laundering compliance program.

FINRA states that it will review firms’ compliance with their markup or markdown disclosure obligations on fixed income transactions with customers pursuant to amendments to FINRA Rule 2232 (Customer Confirmations) and MSRB Rule G-15, which became effective on May 14, 2018.

Protecting senior investors and those who are retired or approaching retirement remains a top priority for FINRA. The self-regulator will continue to assess how firms are protecting  such persons from fraud, sales practice abuses and financial exploitation.

FINRA will assess firms’ supervision of accounts where registered reps serve in a fiduciary capacity, “including holding a power of attorney, acting as a trustee or co-trustee, or having some type of beneficiary relationship with a non-familial customer account.” In particular, FINRA states that it is concerned about registered reps “using their role as a fiduciary to take control of trusts or other assets and direct funds to themselves.”

Cook stated that FINRA will continue to implement “targeted regulatory responses” to address specific risks and compliance issues, pointing to the inaugural regtech conference held in New York last week.

The conference is “just one of several conferences we plan to host in 2019 to foster compliance in the industry,” Cook said.

The “full integration” of FINRA’s enforcement programs was completed last year, Cook noted, “and we have now launched a transformation of our risk monitoring and examination programs to integrate them into a single more effective, efficient and consistent program.”

FINRA, Cook added, “will continue our work to organize the examination program around the firms we regulate and to provide a single point of accountability for all firm examinations.”

Consolidating FINRA’s three exam programs “will avoid duplication” and allow FINRA to conduct exams “that are more tailored to firms’ business models and risks,” Cook said. “The wide-ranging changes underway at FINRA promise to make 2019 a productive year.”

— Check out FINRA Exam Report: 5 Big Problem Areas for Brokers in 2018 on ThinkAdvisor.


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