The Financial Industry Regulatory Authority issued its annual letter to broker-dealers setting forth its regulation and examination priorities for the new year.
In general, FINRA indicated that it would concentrate its reviews on “key sales practice, financial and operational and market integrity matters.” However, it also reminded members they must respond timely to FINRA information requests made as part of investigations and examinations. According to FINRA, it has recently experienced an “increasing number of situations” where members have not provided information in a timely fashion:
[t]his is particularly troubling as FINRA discusses large and complex information requests with firms and is flexible with respect to due dates, rolling productions, scope and format—as long as the integrity of the regulatory matter is not compromised. These situations are not acceptable, as timely productions of information (as well as oral information through interviews and on-the-record testimony) are critical to FINRA achieving its investor protection and market integrity mission by identifying and shutting down bad practices and bad actors at the earliest possible time.
Among the specific areas (there are many more) FINRA will look at this year are:
- Private placements – FINRA is concerned about adequate due diligence and suitability analysis by broker-dealers. FINRA notes that, while recent amendments to rules of the Securities and Exchange Commission permit general solicitation and advertising when offering private placements, all purchasers of the offering must be SEC-defined accredited investors (i.e., certain enumerated, particularly knowledgeable or high net worth entities and persons);
- Anti-money laundering – FINRA says it will focus on certain types of accounts – cash management accounts, and certain delivery versus payment and receipt versus payment accounts to assess the adequacy of broker-dealers’ AML programs This is because, says FINRA, it has seen that:
some firms are not monitoring activity in DVP/RVP accounts for suspicious activity, and are not conducting adequate due diligence to ensure that securities being sold are registered [as required under law] or the transaction is subject to an exemption from registration.
FINRA will also be generally assessing the adequacy of firms’ surveillance activities to detect suspicious activity;
- Cybersecurity – FINRA says it will review broker-dealers’ “approaches to cybersecurity risk management.” This will include reviews of their governance structures, their process for conducting risk assessments and how they address the output from these assessments. In connection with this review, FINRA advised it will soon be publishing the results of a January 2014 member sweep it conducted to better understand cybersecurity threats faced by firms;
- Outsourcing – This is a “priority” area, says FINRA. The agency will seek to ensure that broker-dealers are fully compliant with their regulatory obligations when they outsource them and how they supervise their service providers; and
- Market Integrity – FINRA will examine firms’ technology supporting electronic trading and related controls, with an emphasis on “the development and ongoing supervision of algorithms.” FINRA will seek to identify algorithms that promote manipulative trading activity, as well as firms that grant direct market access with inadequate access controls.
This is the tenth year FINRA has published its “Regulatory and Examination Priorities Letter.”