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The Financial Industry Regulatory Authority (“FINRA”) recently published its 2015 Regulatory and Examinations Priorities Letter.
The priorities for this year are divided into the following three categories: key sales practices, financial and operational matters, and market integrity. Below are several key takeaways regardin FINRA Exam Priorities:
- Complex products: FINRA will continue to scrutinize how brokers market interest rate-sensitive fixed income products, variable annuities, non-traded real estate investment trusts (“REITS”), structured products, and exchange traded products. Exams in this area will routinely focus on due diligence, suitability, disclosure, supervision and training.
- New supervision rules: New supervision rules (FINRA Rules 3110, 3120, 3150 and 3170) became effective on December 1, 2014. Accordingly, FINRA examiners will inspect firms to address regulatory questions and become familiar with how the firms are implementing the new rule requirements.
- Cybersecurity: FINRA will continue to review firms’ approaches to cybersecurity risk management, including their governance structures and processes for conducting risk assessments and addressing the output of those assessments. Later this year, the agency also plans to release the results of its 2014 sweep, which will include principles and effective practices firms should consider in developing and implementing their cybersecurity programs.
- Outsourcing: Citing an increase in the outsourcing of key operational functions, 2015 examinations will include an analysis of the due diligence and risk assessment firms perform on potential providers, as well as the supervision they implement for the outsourced activities and functions.
- High-risk brokers: FINRA is expanding its use of data mining, analytics, specially targeted examinations, and expedited investigations and enforcement actions to remove recidivist and other high-risk brokers from the securities industry.
- Market integrity: In 2015, FINRA will launch a pilot program to conduct fixed income-based examinations focusing on trading issues, including related controls. A newly created team will also focus on identifying potential equity audit trail issues not typically detected through routine compliance sweeps and reviews.
In addition to detailing its 2015 surveillance and examination activities, FINRA also highlighted five areas of concern that it believes “contribute to firms and registered representatives at times compromising the quality of service they provide to customers as well as contribute to compliance and supervisory breakdowns.” They are: alignment of firms’ interests with those of their customers; standards of ethical behavior; development of strong supervisory and risk management systems; marketing and sale of novel products and services; and management of conflicts of interest. According to FINRA, tackling these challenges will enable firms to get ahead of many of the concerns it raises in its exam priorities letter.
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List of FINRA Exam Priorites for 2015
Author: Dan Brecher
The Financial Industry Regulatory Authority (“FINRA”) recently published its 2015 Regulatory and Examinations Priorities Letter.
The priorities for this year are divided into the following three categories: key sales practices, financial and operational matters, and market integrity. Below are several key takeaways regardin FINRA Exam Priorities:
- Complex products: FINRA will continue to scrutinize how brokers market interest rate-sensitive fixed income products, variable annuities, non-traded real estate investment trusts (“REITS”), structured products, and exchange traded products. Exams in this area will routinely focus on due diligence, suitability, disclosure, supervision and training.
- New supervision rules: New supervision rules (FINRA Rules 3110, 3120, 3150 and 3170) became effective on December 1, 2014. Accordingly, FINRA examiners will inspect firms to address regulatory questions and become familiar with how the firms are implementing the new rule requirements.
- Cybersecurity: FINRA will continue to review firms’ approaches to cybersecurity risk management, including their governance structures and processes for conducting risk assessments and addressing the output of those assessments. Later this year, the agency also plans to release the results of its 2014 sweep, which will include principles and effective practices firms should consider in developing and implementing their cybersecurity programs.
- Outsourcing: Citing an increase in the outsourcing of key operational functions, 2015 examinations will include an analysis of the due diligence and risk assessment firms perform on potential providers, as well as the supervision they implement for the outsourced activities and functions.
- High-risk brokers: FINRA is expanding its use of data mining, analytics, specially targeted examinations, and expedited investigations and enforcement actions to remove recidivist and other high-risk brokers from the securities industry.
- Market integrity: In 2015, FINRA will launch a pilot program to conduct fixed income-based examinations focusing on trading issues, including related controls. A newly created team will also focus on identifying potential equity audit trail issues not typically detected through routine compliance sweeps and reviews.
In addition to detailing its 2015 surveillance and examination activities, FINRA also highlighted five areas of concern that it believes “contribute to firms and registered representatives at times compromising the quality of service they provide to customers as well as contribute to compliance and supervisory breakdowns.” They are: alignment of firms’ interests with those of their customers; standards of ethical behavior; development of strong supervisory and risk management systems; marketing and sale of novel products and services; and management of conflicts of interest. According to FINRA, tackling these challenges will enable firms to get ahead of many of the concerns it raises in its exam priorities letter.