FINRA 2020 Risk Monitoring and Examination Priorities

February 4, 2020 by ACA Compliance Group


On January 8, 2020, FINRA released its Risk Monitoring and Examination Priorities Letter for 2020. While noting that the letter’s format had been changed to concentrate more on new risk areas, FINRA stated that it would continue to examine the areas of concern on which it repeatedly focused in previous years.

In his cover letter to the release, FINRA President and CEO Robert Cooke highlighted the ways in which the regulator has worked to meet its mission of maintaining “Investor Protection and Market Integrity.” These efforts have included publishing reports such as the annual “Report on Examination Priorities” and holding conferences that covered topics such as cybersecurity, advertising, and Regulation Best Interest (“Reg BI”).

Cooke also outlined FINRA’s new examination program, which will group all firms into one of the following major business categories:

  • Retail
  • Capital Markets
  • Carrying and Clearing
  • Trading and Execution
  • Diversified

Each category is broken into subgroups to better align examinations with FINRA member activities. Each member firm will also be assigned a single contact who will be involved in risk assessment, monitoring, and exam planning that is based specifically on the firm’s business activities.

As in previous years, the letter outlines the priorities for FINRA’s monitoring, surveillance, and examination programs. It lists new priorities as well as those that continue to concern the regulator. The new priorities are covered in greater detail in the letter, so FINRA encourages firms to reference previous letters for detailed information on the ongoing priorities.

Also new to the 2020 letter is FINRA’s provision of questions that may be asked during an examination in relation to the topics noted in the letter.

The areas covered by the 2020 letter include the below topics.

Sales Practice and Supervision

FINRA’s letter indicates that it will continue to review the Sales Practice and Supervision compliance of firms in the areas highlighted in previous priorities letters. These areas include:

  • complex products
  • variable annuities
  • private placements
  • fixed income markups/markdowns
  • representatives in positions of trust or authority with customers
  • senior investors

The new priority areas for Sales Practice and Supervision include the following:

  • Reg BI and Form CRS
    Prior to the June 30, 2020 compliance date for Reg BI, FINRA will review member firms’ preparations to comply with the regulation. After the compliance date, FINRA will review firms’ policies and procedures, as well as the steps they are taking to meet the obligations outlined in Reg BI. They will also review firms’ policies and procedures for filing, maintaining, and distributing the Form CRS.

  • Communications with the Public
    FINRA will review how firms are complying with FINRA Rule 2210. In addition, FINRA will continue to review firms’ supervision and retention of communications with the public. FINRA will also focus on retail communications for private placements and communications via digital forums.

  • Cash Management and Bank-Sweep Programs
    FINRA will review member firms’ bank-sweep programs. The reviews will include examining cash management services such as checking, debit and credit cards, and ATM access for compliance with regulations such as FINRA Rules 1017, 2010, and 2210, as well as Securities Exchange Act of 1934 (“Exchange Act”) Rules 15c3-1 and 15c3-3.

  • Sales of Initial Public (“IPO”) Shares
    On November 5, 2019, the U.S. Securities and Exchange Commission (the “SEC”) approved amendments to FINRA Rules 5130 and 5131. FINRA will review firms’ compliance with these rules in their IPO activities. The reviews may include examining the controls firms have in place regarding allocating IPO shares.

  • Trading Authorization
    FINRA will review firms’ supervisory systems to ensure they have appropriate trading activity controls. Specifically, FINRA will focus on registered representatives’ discretion and the documentation of solicited and unsolicited trades.

Market Integrity

FINRA will continue to review firms’ compliance in relation to Market Integrity in areas that were highlighted in previous priorities letters. These areas include:

  • market manipulation
  • TRACE reporting
  • short sales
  • short tenders

FINRA also reminds members of their obligation to report to the Consolidated Audit Trail (“CAT”) system beginning April 2020.

The new priority areas for Market Integrity include the following:

  • Direct Market Access
    FINRA will review firms’ supervisory systems regarding Direct Market Access for compliance with the Market Access Rule (Exchange Act Rule 15c3-5).

  • Best Execution
    FINRA will continue to review firms’ compliance regarding best execution obligations. Specifically, FINRA will focus on areas such as routing decisions, odd-lot handling, U.S. Treasury securities, and options.

  • Disclosure of Routing Information
    FINRA will review for compliance with the disclosure requirements for National Market System (“NMS”) stocks and listed options as detailed in amended Rule 606 of Regulation NMS.

  • Vendor Display Rule FINRA will review firms’ supervisory controls related to Rule 603 of Regulation NMS (“Vendor Display Rule”) and how they provide customers with current consolidated National Best Bid and Offer (“NBBO”) information.

Financial Management

FINRA will continue to review firms’ compliance related to Financial Management in their risk management programs, as well as for compliance with Exchange Act Rules 15c3-1 and 15c3-3.

The new priority areas for Financial Management include the following:

  • Digital Assets
    FINRA indicated that it is receiving new member applications (“NMAs”) and continuing member applications (“CMAs”) to conduct business in digital assets. When firms conduct such business, FINRA will review their supervision and controls in areas such as fair and balanced communications and facilitation in initial and secondary markets.

  • Liquidity Management
    FINRA will continue to review firms’ risk programs as they relate to liquidity. These programs were previously addressed in FINRA Regulatory Notice 15-33.

  • Contractual Commitment Arising from Underwriting Activities
    Pursuant to Exchange Act Rule 15c3-1(c)(2)(viii), ACA noted that firms conducting underwriting activities have certain obligations that include open contractual commitment charges, moment-to-moment calculations, and appropriate net capital treatment of underwritings. FINRA will look to see how firms supervise their underwriting activities for compliance with the net capital requirements.

  • London Interbank Offered Rate (“LIBOR”) Transition
    As part of its efforts to help member firms, FINRA will work with them apart from the exam program to review what steps they are taking to prepare for LIBOR’s retirement in 2021. The focus will be on LIBOR-linked products and how they affect the customers of such products.

Firm Operations

FINRA will continue to review firms’ compliance with Exchange Act Rule 10b-10 and FINRA Rules 2232 and 3310.

The new priority areas for Firm Operations include the following:

  • Cybersecurity
    As cybersecurity continues to be a focus area inside and outside the financial industry, FINRA will review firms’ cybersecurity policies and procedures as they relate to compliance with Regulation S-P.

  • Technology Governance
    Firms have become increasingly reliant on technology, especially as it relates to their customer-facing systems and the systems used to supervise their business. FINRA will review firms’ policies and procedures related to technology governance, especially as they relate to complying with Exchange Act Rules 17a-3 and 17a-4 and FINRA Rules 4370 and 3110.

ACA Guidance

As in previous years, FINRA has given the industry guidance on areas of concern for 2020. ACA reminds firms that these are not exhaustive lists of the areas regulators will review during examinations. As part of their planning for 2020, it is important for firms to identify the risk areas pertinent to their business lines and review these areas for compliance with the applicable rules and regulations. These priority lists provide at least a baseline for firms to confirm that their controls address these key regulatory areas.

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Additional Information

For more information on the FINRA 2020 Risk Monitoring and Examination Priorities, please contact your ACA consultant or Dee Stafford at (561) 628-5288 or dstafford@acacompliancegroup.com.