FINRA announced its 2019 regulatory and exam priorities in a Cover Letter to member firms that included a link to a newly-named seven-page Risk Monitoring and Examination Priorities Letter addressed to the securities industry.
We reported in SAA 2019-01 (Jan. 2), that the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) on December 20th issued its exam priorities for 2019. The 12-page OCIE Letter announced several key exam priorities. Weighing in January 22nd with some overlapping objectives is FINRA.
A New Approach
The Cover Letter issued by FINRA’s President and Chief Executive Officer, Robert W. Cook, announces: “This year’s letter takes a somewhat new approach -- as compared to similar letters issued in prior years -- by focusing primarily on those topics that will be materially new areas of emphasis for our risk monitoring and examination programs in the coming year. FINRA will, of course, continue to review and examine for longstanding priorities discussed in greater detail in past letters, but 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….”
Core Focus Areas
The Priorities Letter highlights several core focus areas, which we repeat verbatim with some representative descriptions; footnotes are omitted. Under “Highlighted Items” we find: Online Distribution Platforms; Fixed Income Mark-Up Disclosure (FINRA will review firms’ compliance with their mark-up or mark-down disclosure obligations on fixed income transactions with customers); and Regulatory Technology (FINRA will engage with firms to understand how they are using such tools and addressing related risks, challenges or regulatory concerns). “Sales Practice Risks” lists: Suitability; Senior Investors; and Outside Business Activities and Private Securities Transactions (We are particularly concerned about fundraising activities for entities that the associated persons control or in which they have an interest, specifically entities with potentially misleading names that are similar to established issuers). “Operational Risks” includes: Supervision of Digital Assets Business; and Customer Due Diligence and Suspicious Activity Reviews. The Letter lists under “Market Risks” these priorities: Best Execution; Market Manipulation (This year, FINRA will focus on manipulative trading in correlated ETPs, including those that track common, broad market indices); Market Access: FINRA will … [be] focusing on how firms apply appropriate controls and limits to sponsored access orders…); Short Sales; and Short Tenders (As in 2018, FINRA will review how firms account for their options positions when tendering shares in the offer). The last area is “Financial Risks,” as follows: Credit Risk; and Funding and Liquidity (FINRA will continue to evaluate firms’ liquidity planning, including whether they have a reasonable process to regularly assess the adequacy of their liquidity pools and update their stress test assumptions based on changes in their businesses, products and customers).
Arbitration Again Doesn’t Make the Cut
In 2017, the Office of Dispute Resolution (“ODR”) was included in FINRA’s regulatory priorities for the first time in three years. That was not the case this year or last year; arbitration is mentioned just once in endnote 2. In a January 3, 2018 Financial Adviser IQ interview, Director of Arbitration Rick Berry discussed ODR’s 2018 goals. Perhaps another interview is in the offing to articulate this year’s goals?
(ed: *Kudos again to FINRA for letting firms (and investors) know on what areas the Authority intends to focus. We like the “what’s new?” focus. This year marks the Open Letter’s 14th anniversary. **We wonder whether “Funding and Liquidity” includes examining a firm’s ability to pay arbitration awards? ***There was no Press Release this year, but FINRA posted a 21-minute Podcast, The Annual Priorities Letter: A Fresh Take. ****FINRA invites comments or suggestions on how it can improve the Priorities Letter, to be sent to Carlo di Florio, Executive Vice President, Member Supervision/Shared Services, at firstname.lastname@example.org or Steven Polansky, Senior Director, Member Supervision/Shared Services, at email@example.com. *****Query whether ODR should post its goals on the FINRA Website, just as the regulatory objectives are published each year?) (SAC Ref. No. 2019-05-01)
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