FINRA has released its 2020 Risk Monitoring and Examination Priorities Letter (2020 Priorities Letter) highlighting “new and emerging” areas where it will focus on risk monitoring, surveillance, and examination programs in addition to “ongoing priority” areas (as discussed in previous FINRA letters). The identified new and emerging areas include:
Sales practice and supervision
- Regulation Best Interest and Form CRS. In the first part of the year, FINRA will review firms’ preparedness for Regulation Best Interest (Reg BI) to gain an understanding of implementation challenges they face and, after the June 30, 2020 compliance date, will examine firms’ compliance with Reg BI, Form CRS and related SEC guidance and interpretations. FINRA staff expects to work with SEC staff to ensure consistency in examining broker-dealers and their associated persons for compliance with Reg BI and Form CRS.
- Communications with the public, including how firms:
- Review, approve, supervise, and distribute retail communications regarding private placement securities via online distribution platforms as well as traditional channels
- Review, approve, supervise, and retain retail communications through digital channels.
- Cash management and bank sweep accounts, including compliance with FINRA and SEC rules covering change in ownership, standards of commercial honor and principles of trade, communications with the public, net capital, and customer protection.
- Sales of initial public offering shares, including procedures to detect and address potential instances of flipping or “spinning,” controls to prevent allocations to restricted persons, and procedures to verify customer information.
- Trading authorization, including supervisory systems relating to trading authorization, discretionary accounts and key transaction descriptors, such as solicitation indicators
Ongoing sales practices areas of focus will include complex products, variable annuities, private placements, fixed-income mark-up/mark-down disclosures, representatives acting in certain positions of trust or authority, and senior investors.
- Direct market access controls, giving consideration to controls for monitoring and responding to aberrant behavior by trading algorithms, adjusting customer credit limit thresholds, and implementing and monitoring vendor tools.
- Best execution, focusing on whether firms use reasonable diligence to determine that customer order flow is directed to the best market given the size and types of orders, and the terms and conditions of orders, giving particular attention to routing decisions, odd-lots handling, U.S. Treasury Securities pricing, and options orders.
- Disclosure of order routing information, in compliance with Regulation National Market System (NMS) Rule 606, which requires broker-dealers to provide new customer-specific reports for not held orders in NMS stocks.
- Vendor display rule, and in particular, the adequacy of firms’ controls and supervisory systems to provide their customers with the current consolidated National Best Bid or Offer (NBBO) as required by Regulation NMS Rule 603
Ongoing obligations discussed in prior years’ letters including market manipulation, Trade Reporting and Compliance Engine (TRACE) reporting, short sales, and short tenders.
- Digital assets, including a firms’ presentation of digital assets in marketing materials and retail communications, particularly with regard to investment risks and affiliated entities
- Liquidity management, including stress testing and contingency funding plans
- Contractual commitments related to underwriting activities
- LIBOR transition – FINRA will engage with firms outside the examination program to understand how the industry is preparing
- Technology governance, including change- and problem-management practices that may impact customer-facing activities, trading, operations, back-office and compliance programs, such as business continuity planning.
FINRA will continue to assess firms’ supervisory controls relating to Customer Confirmations and firms’ anti-money laundering compliance program. Firms should also expect that FINRA will assess whether their policies and procedures are reasonably designed to protect customer records and information against cybersecurity threats.
Related KPMG Regulatory Alerts include: