FINRA announced its 2017 regulatory and exam priorities, chief among them corporate culture, in a January 4th Cover Letter to firms that included a link to a hefty 11-page Open Letter to the securities industry. For the first time in three years, arbitration is included.
This is the first such Letter issued by FINRA’s new President and Chief Executive Officer, Robert W. Cook. Says the Cover Letter: “As you will see, a common thread running throughout the Priorities Letter is a focus on core ‘blocking and tackling’ issues of compliance, supervision and risk management. Most of the topics addressed in this year’s Letter have been highlighted in prior years, but specific areas of emphasis have been updated or modified based on recent observations and experience. Attention to the core regulatory requirements identified in the Letter -- and how to address them in light of new business challenges and market developments -- will serve investors and markets well.” Mr. Cook adds that FINRA’s 2017 regulatory and exam priorities were shaped by a “listening tour” where he met with firms, regulators, and investor groups.
Core Focus Areas
The Open Letter highlights several core focus areas, which we repeat verbatim with representative descriptions. Introduction: For its part, FINRA has enhanced its risk-based surveillance and examination programs to apply a nationally consistent approach to identify and focus on material conduct at firms based on our assessment of specified sales practice, financial, operational and market-integrity risks. High-risk and Recidivist Brokers: FINRA will devote particular attention to firms’ hiring and monitoring of high-risk and recidivist brokers, including whether firms establish appropriate supervisory and compliance controls for such persons. Sales Practices: Senior Investors; Product Suitability and Concentration; Excessive and Short-term Trading of Long-term Products; Outside Business Activities and Private Securities Transactions; and Social Media and Electronic Communications Retention and Supervision. Financial Risks: Liquidity Risk; Financial Risk Management; and Credit Risk Policies, Procedures and Risk Limit Determinations Under FINRA Rule 4210. Operational Risks: Cybersecurity; Supervisory Controls Testing; Customer Protection/Segregation of Client Assets; Regulation SHO – Close Out and Easy to Borrow; Anti-Money Laundering and Suspicious Activity Monitoring; and Municipal Advisor Registration. Market Integrity: Manipulation; Best Execution; Audit Trail Reporting Early Remediation Initiative and Expansion; Tick Size Pilot; Market Access Rule; Trading Examinations; and Fixed Income Securities Surveillance Program.
Arbitration Makes the Cut
For the first time in three years the Letter references arbitration. The Open Letter states the following under High-risk and Recidivist Brokers on page two: “FINRA will assess whether firms develop and implement a supervisory plan reasonably tailored to detect and prevent future misconduct by a particular broker based on prior misconduct and regulatory disclosures. We will also focus on firms with a concentration of brokers with significant past disciplinary records or a number of sales practice complaints or arbitrations” (emphasis added).
(ed: *Kudos to FINRA for letting firms (and investors) know on what areas the Authority intends to focus. This year marks the Open Letter’s 12th anniversary. **We are pleased to see arbitration back in the Letter. The dispute resolution forum often serves as a harbinger of future regulatory concerns. ***Here’s an excellent analysis from Bates Group that, among other things, contains a detailed chart showing the shifting priorities over the past three Open Letters. ****CEO Cook just delivered a speech at a SIFMA Compliance & Legal Society monthly luncheon on January 10 (The Harvard Club, NYC), in which he repeated the message (verbatim, it seems) about the listening tour and the "blocking and tackling" issues central to compliance. That he, as CEO, is personally delivering the message is significant; it shows real interest "from the top down" in this year's program. We have not heard words like this in a long time: "...Listening to and working with market participants are fundamental features of the self-regulatory model." Next, they'll be hiring from the Street, instead of the streets (e.g., 100 F Street, NE) of Washington.... *****Speaking of the SEC, we just learned as we went to press that the SEC has announced its 2017 Examination Priorities. We'll cover this topic next week. Spoiler Alert: new focus areas "include electronic investment advice, money market funds, and senior investors.") (SAC Ref. No. 2017-02-01)
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