FINRA Exam Priorities for 2013 – January 29, 2013
On January 11, FINRA released its annual regulatory and examination priorities for 2013. FINRA publishes this letter each year to help member firms understand what areas are of concern and where it will enhance scrutiny. Broker-dealers should assess whether their internal controls, supervisory systems, and risk management practices properly address the issues highlighted by FINRA.
Described below are some key examination priorities for 2013. FINRA intends to focus on these areas broadly across its membership and during targeted reviews.
- Business Conduct and Sales Practices – The new Suitability Rule (FINRA Rule 2111) and Know Your Customer Rule (FINRA Rule 2090) became effective on July 9, 2012. FINRA will concentrate on determining whether member firms and their registered representatives understand the products they offer and their associated risks. FINRA continues to have concerns about the representatives’ ability to fully explain these products and risks to customers. Products FINRA intends to spotlight this year include Business Development Companies, Leverage Loan Products, Commercial Mortgage-Backed Securities, High-Yield Debt Instruments, Variable Annuities, Structured Products, Closed-End Funds, Non-Traded REITs, and Private Placements.
- Private Placement Securities – The new Private Placements of Securities Rule (FINRA Rule 5123), which pertains to filing offering documents, became effective December 3, 2012. FINRA will use the information produced from the new filing requirement to enhance its risk-based supervision of private placements and to better identify and assess higher-risk transactions.
- Anti-Money Laundering – Broker-dealers that offer complex products and have higher-risk business models will be an area of heightened attention for FINRA this year. In particular, for U.S. broker-dealers associated with foreign affiliates, FINRA remains concerned about the level of due diligence performed on foreign transactions.
- Insider Trading – FINRA will be evaluating whether member firms have policies and procedures in place for periodic, risk-based testing of information safeguarding and handling of material nonpublic information.
- Cyber-Security and Data Integrity – An ongoing concern for FINRA is the industry’s vulnerability to disruptions of and unauthorized access to customer account information.
- Market Regulation Priorities – FINRA will dedicate additional time to review the development, surveillance, accuracy, and supervisory oversight of firm trading systems. Particular emphasis will be placed on firms that operate an Alternative Trading System (“ATS”) and those firms affiliated with them.
- Fixed Income – In 2013, FINRA will continue to concentrate on trading issues such as fair pricing, best execution, and interpositioning. A specific focus will be fair pricing of collateralized mortgage obligations and mortgage-backed securities.
For more complete information on FINRA exam priorities for 2013, broker-dealers should review the 2013 Regulatory and Examination Priorities Letter.
Please email Dee Stafford or call her at (310) 332-8840 with any questions.