In late January, FINRA informed member firms' chief compliance officers of key issues facing the securities industry. In particular, FINRA noted that it was updating and improving its regulatory programs, focusing on risk based examinations, investigations and enforcement. FINRA indicated that it will continue to collect data and review this data to ensure that it appropriately uses its enforcement regulatory and examination resources in the upcoming year.
FINRA announced that its examination priorities were set against the economic environment that investors have faced since 2008. As a result, it will focus on the increased risk of aggressive yield chasing, inappropriate sales practices and product offerings, unsuitability, misappropriation and fraud.
One FINRA’s primary sales practice and business conduct focuses will concern retail customers over a number of different products, including mortgage-backed and commercial mortgage-backed securities, uncommon non-traded REITs, municipal securities, exchange traded products, variable annuities, structured products as well as private placement securities and unregistered securities, among others. Interestingly, FINRA will also focus in on various church bonds and promissory notes that are issued as well as life settlements. FINRA will continue its efforts to stamp out micro cap fraud that it has seen in a number of the markets that it regulates. Reverse mergers will also continue to play a part in both FINRA as well as the SEC’s enforcement programs. As many know, Chinese issuers have been the target in these reverse merger cases, and the SEC and FINRA will continue their heightened enforcement approach.
FINRA will continue to monitor when firms permit their registered representatives to engage in private securities transactions and outside business activities. Moreover, FINRA will assuredly review supervision integrity and internal controls. Information technology and cyber security will also be prime elements of review as is outsourcing and fees coupled with the use of foreign finders.
FINRA will also consider branch office inspections to be a critical aspect of its examination program.
FINRA is also very concerned about social media and electronic communication and will continue to monitor this aspect of broker dealer operations in the future.
Interestingly, there are a number of initiatives relating to FOCUS information as well as leverage and liquidity that FINRA examiners will review when analyzing firm balance sheets and financials. Of course, examinations of rogue trading will continue given certain newsworthy events, and FINRA will look for internal controls and risk management systems to stop this type of practice from going forward. FINRA will also review the pricing of illiquid or hard to value securities as well as margin lending practices and the custody of assets relating to collateralizing margin loans.
Net capital expense sharing arrangements, withdrawal of capital, inaccurate books and records and protection of customer funds and securities will also be reviewed as well. SEC Exchange Act Rule 15c3-3 will also be and examination priority for the upcoming year as will be SEC Exchange Act Rule 15c3-5, the market access rule, and its application to broker dealers and customers, who engage in an exchange or alternative trading system.
FINRA exams will also focus in on member firms’ information barriers, and if those barriers are being followed to safeguard customer and material non-public information. Additionally, FINRA will look at fixed income securities and focus on high frequency trading strategies as well as market maker quoting obligations, OATS issues, and the appropriate coding of orders. Further, FINRA will review the oversight and redemption process for exchange traded products as well as municipal securities and conflicts of interest in the sale and marketing of complex investments.
Finally, FINRA believes that, by publishing these key risk areas, it will enhance its enforcement and examination programs as it moves forward in the new year.