1. Regulation Best Interest
In the run-up to the anticipated June 30 Reg BI compliance date, FINRA examiners will seek to gain an understanding of implementation challenges broker-dealers may face. After June 30, FINRA will examine firms’ compliance with Reg BI, Form CRS and related SEC guidance and interpretations. See below for a list of the questions examiners may ask.
2. Communication Around Private Placements and via Digital Channels
FINRA will review how firms handle retail communications regarding private placement securities via online distribution platforms, as well as traditional channels.
Firms and reps’ use of digital communication channels — texting, messaging, social media or collaboration applications — will also be reviewed, as they may pose challenges to firms’ ability to comply with obligations related to the review and retention of such communications.
3. Cash Management and Bank Sweep Programs
As commission practices change, cash management services that sweep investor cash into firms’ affiliated or partner banks or money market funds (bank sweep programs) have taken on a greater significance. The Programs may offer retail investors a variety of additional services, such as check writing, debit cards and ATM withdrawals.
In reviewing BDs’ bank sweep programs, FINRA will gauge, among other factors, if a BD clearly communicates the nature of the sweep arrangement, as well as the alternatives for cash management available to customers. Also assessed will be if a BD incorrectly implied that a brokerage account is similar to or the same as a “checking and savings account” at a bank.
4. Initial Public Offerings
As the IPO market has grown and received additional attention over the past year, FINRA is focusing its attention on firms’ obligations under FINRA Rules 5130 (Restrictions on the Purchase and Sale of Initial Equity Public Offerings) and 5131 (New Issue Allocations and Distributions).
5. Digital Assets
A new focus area. FINRA is receiving an increasing number of New Member Applications (NMAs) and Continuing Member Applications (CMAs) from firms seeking to engage in business activities related to digital assets.
In reviewing a firm’s digital asset activities, FINRA will assess whether a firm considering engaging in digital asset activities has filed a CMA with FINRA, as well as whether a firm provides a fair and balanced presentation in marketing materials and retail communications, including addressing risks presented by digital asset investments.
The Financial Industry Regulatory Authority will spend the first part of 2020 zeroing in on broker-dealers’ compliance with the Securities and Exchange Commission’s Regulation Best Interest and the advice-standards package’s Customer Relationship Summary, or Form CRS.
FINRA’s 2020 exam priorities letter addresses new and emerging areas, noted FINRA CEO Robert Cook, and “will mark an important inflection point in FINRA’s risk monitoring and examination program,” as FINRA has integrated its three different exam programs into a single framework.
FINRA member firms are now grouped into one of five main firm business models: Retail, Capital Markets, Carrying and Clearing, Trading and Execution, and Diversified.
When examining for compliance with Reg BI — which will be required as of June 30 — FINRA will review the following:
- Procedures and training in place to assess recommendations using a best interest standard
- Whether the firm and its associated persons apply a best interest standard to recommendations of types of accounts
- If your firm and your associated persons agree to provide account monitoring, do you apply the best interest standard to both explicit and implicit hold recommendations?
- Whether the firm and associated persons consider the express new elements of care, skill and costs when making recommendations to retail customers
- Do your firm and your associated persons consider reasonably available alternatives to the recommendation?
- Whether the firm and registered reps guard against excessive trading, irrespective of whether the broker-dealer or associated person “controls” the account
- Firm’s policies and procedures to provide the disclosures required by Reg BI, to identify and address conflicts of interest, and regarding the filing, updating and delivery of Form CRS.
Check out the gallery above to see FINRA’s top exam priorities for 2020.
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