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In January 2020, the Financial Industry Regulatory Authority (FINRA) released it’s 2020 Risk Monitoring and Examination Priorities Letter highlighting areas of focus for their risk monitoring, surveillance, and examination programs as well as new and emerging areas. As previously outlined in a December 2019 press release, FINRA President and CEO Robert Cook noted that significant changes had been made to FINRA’s examination programs. Specifically, its integration of three examination programs (business conduct, financial, and trading compliance) under a single framework designed to better direct and align examination resources to the risk profile and complexity of member firms. Under this new unified program FINRA member firms are grouped into one of five main firm business models:

  1. Retail
  2. Capital Markets
  3. Carrying and Clearing
  4. Trading and Execution
  5. Diversified
FINRA Audit Guide

Cook also referenced FINRA’s 2019 Report on Examination Findings and Observations, which provides a summary of key findings, observations, and effective practices identified during recent FINRA member firm examinations. Primary areas of focus include:

  • deficient supervision and written supervisory procedures
  • inadequate suitability procedures
  • vulnerabilities in digital communications compliance,
  • inadequate anti-money laundering (AML) procedures
  • deficient business continuity plans
  • improper fixed income mark-up disclosure practices
  • insufficient best execution procedures
  • insufficient direct market access controls
  • gaps in short sale compliance

Firms should evaluate their compliance program and examination preparation activities in light of the 2020 Priorities Letter. The examination priorities are organized around four focus areas:

1. Sales Practice and Supervision

FINRA will continue to evaluate firms’ compliance with sales practice obligations to their customers. These areas of focus 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. In addition to these topics, FINRA will review firms’ compliance with obligations related to several new or emerging areas:

  • Regulation Best Interest (Reg. BI) and Form Client Relationship Summary (Form CRS)
  • Communication with the Public
  • Cash Management and Bank Sweep Programs
  • Sales of Initial Public Offering (IPO) Shares
  • Trading Authorization

2. Market Integrity

In addition to continuing its review of firms’ compliance relating to market manipulation, Trade Reporting and Compliance Engine (TRACE) reporting, short sales and short tenders, FINRA will also focus on:

  • Direct Market Access Controls
  • Best Execution
  • Disclosure of Order Routing Information
  • Vendor Display Rule

3. Financial Management

In addition to evaluating firms’ Customer Protection Rule and Net Capital Rule compliance programs, and firms’ financial risk management programs, FINRA will review the following areas:

  • Digital Assets
  • Liquidity Management
  • Contractual Commitment Arising from Underwriting Activities
  • London Interbank Offered Rate (LIBOR) Transition

4. Firm Operations

In addition to assessing firms’ supervisory controls relating to Customer Confirmations and firms’ compliance with Anti-Money Laundering requirements, FINRA will also evaluate the new areas of focus:

  • Cybersecurity
  • Technology Governance

Conclusion

The 2020 Priorities Letter is not exhaustive. In addition to the above priorities, member firm examinations will include inquiries into a variety of other areas based on a firm’s history, business arrangements, operations, and other risk factors. The time between examinations is the ideal window for improving compliance efforts. Without regulators looking over their shoulders, firms can first determine their actual costs of compliance — in terms of dollars and employee hours — and then decide what investments should be made in software, training, consultants, and extra testing.

FINRA Audit Guide
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