RIA Compliance Blog
On January 8, 2018, FINRA published its 2018 Annual Regulatory and Examination Priorities Letter. As we noted in our last blog post, FINRA announced in December 2017 that it would continue to make enforcement a priority in the coming year. This Letter can be useful in helping firms ensure compliance since it outlines regulatory issues that FINRA plans to prioritize in the coming year.
According to the Letter, fraud is perpetually a significant issue for FINRA. This past year, FINRA made numerous referrals to the Securities and Exchange Commission “for potential insider trading and other fraudulent activities involving individuals outside FINRA’s jurisdiction.” One area of fraud that FINRA intends to place particular focus on is microcap fraud schemes, especially schemes targeting senior investors. FINRA advises member firms that they should pay attention to their brokers’ activities involving microcap stocks, especially when the brokers show a newfound interest in purchasing microcap stocks for their accounts or for customers’ accounts.
FINRA also plans to continue its focus on pinpointing high-risk firms and brokers and minimizing the possible risks that they can create for investors. To accomplish this, FINRA intends to concentrate on firms’ hiring and supervisory practices for high-risk brokers. It also plans to concentrate on high-risk practices such as “recommendations for speculative or complex products by high-risk brokers to investors who may not have the necessary sophistication, experience or investment objectives.” FINRA also intends to continue monitoring firms’ controls pertaining to registered persons’ outside business activities, such as incidents of “settling away where registered representatives borrow money from their customers.”
FINRA will also focus on a variety of operational and financial risks. For example, in light of natural disasters such as Hurricanes Harvey and Irma, FINRA will conduct more reviews of member firms’ business continuity plans, with a particular focus on how they are implemented. FINRA also intends to examine whether member firms have established sufficient controls and supervision to shield customer assets. On the technology front, FINRA intends to evaluate member firms’ ability to adopt adequate controls pertaining to changes to their information technology and examine the adequacy of member firms’ cybersecurity policies. FINRA also plans to evaluate the sufficiency of member firms’ anti-money laundering policies, including the ability to uncover and disclose suspicious transactions.
FINRA also intends to prioritize various sales practice risks this year. For example, FINRA intends to continue to evaluate the sufficiency of member firms’ suitability policies in light of the fact that the amount and complexity of investment products is continuing to increase. FINRA also intends to oversee developments in the field of digital assets (including cryptocurrencies) and initial coin offerings (“ICOs”) in light of the fact that those assets have obtained noteworthy media and regulatory attention in the past year. FINRA also plans to give priority to member firms’ policies and procedures regarding margin loans and securities backed lines of credit.
Market integrity is another topic that FINRA intends to give priority to this year. For example, FINRA intends to continue its focus from 2017 on preventing market manipulation in order to preserve market integrity. FINRA also plans to grow its equity best execution surveillance program, as well as its review of best execution quality and fair pricing in fixed income securities. Finally, FINRA plans to place greater focus on member firms’ compliance with Regulation SHO, FINRA’s fixed income surveillance and trading examination programs, FINRA’s new surveillance program to detect potential frontrunning in correlated options products, the Market Access Rule, and alternative trading system surveillance.
FINRA also highlighted new rules that will become enforceable in 2018. For example, New Rule 2165, which governs financial exploitation of specified adults, such as seniors, will go into effect on February 5. An amendment to FINRA Rule 4512 which will obligate member firms to “obtain the name of and contact information for a trusted contact person for a non-institutional customer’s account” will become effective on February 5. All FINRA member firms must comply with the Financial Crime Enforcement Network’s Customer Due Diligence Rule by May 11. The amendments to FINRA Rule 2232, which covers customer confirmations, will become effective on May 14. FINRA’s new margin requirements for covered agency transactions under FINRA Rule 4210 will become effective on June 25. Finally, the new consolidated FINRA registration rules will become effective on October 1.
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds, and issuers of securities, among others. Our regulatory practice group assists financial service providers with complex issues that arise in the course of their business, including compliance with federal and state laws and rules. Please visit our website for more information.