FINRA marked the new year by releasing the annual Regulatory and Examination Priorities Letter, identifying areas the regulator will focus on in 2018. While the letter includes new topics and ongoing areas of focus, supervision is a common theme emphasized throughout the 2018 letter. A nice feature to this year’s Letter is a list of new rules that become enforceable in 2018. This letter should be incorporated into all firms’ checklist for program enhancement and to prepare for upcoming examinations.
The letter identifies a number of fraudulent activities FINRA will focus on this year including insider trading, microcap pump-and-dump schemes, issuer fraud and Ponzi schemes. FINRA will focus on schemes targeting senior investors and encourages firms to utilize tools to protect this consumer demographic with the addition of new Rule 2165 (Financial Exploitation of Specified Adults) and amendments to Rule 4512 (Customer Account Information). Firms are encouraged to continue monitoring their brokers’ activities in microcap stocks; evaluate internal policies and training regarding permissible communications and interactions with investors concerning microcap stocks.
High-risk Brokers and Firms
A top priority for FINRA is continuing to closely monitor high-risk firms and individual brokers. FINRA will focus on firms’ supervisory practices for high-risk brokers, including, remote supervision arrangements and branch inspection programs. FINRA reminds firms of their existing obligation to adopt and implement tailored heightened supervisory procedures under FINRA Rule 3110 (Supervision) for high-risk individuals. FINRA also reminds firms to review their procedures related to private securities transactions and control over outside business activities (“OBAs”), including identification of instances where brokers borrow money from their customers or make payments to customers from their outside business bank accounts.
Business Continuity Planning
A new examination area on the list is Business Continuity Plans (BCPs). FINRA intends to review member firms’ BCPs, including how and when firms activate their BCPs, how they accomplish data back-up and recovery, and how they coordinate with their affiliates and vendors during a business continuity situation. FINRA also expressed concerns about increased incidences of customer service, as well as regulatory problems arising from deficiencies in firms’ information and technology change management policies and procedures.
FINRA continues to focus on anti-money laundering (AML) programs. FINRA noted ongoing concerns about the adequacy of firms’ policies and procedures to detect and report suspicious transactions, resources for AML monitoring, and firms’ independent testing of their AML programs.
Sales Practices Risks
FINRA will continue to assess the adequacy of firms’ controls to meet their suitability obligations. This includes reviewing proper vetting procedures and supervisory systems put in place. A new area of focus for FINRA warns brokers about moving clients from brokerage accounts to advisory accounts. “FINRA will review situations in which registered representatives recommend a switch from a brokerage account to an investment adviser account where that switch clearly disadvantages the customer…” the letter states. Firms must have sufficient supervisory mechanisms in place to prevent such activity.
Firms should consider the FINRA areas of focus and take the time to review your Written Supervisory Procedures to ensure the policies comply with regulatory requirements. Adopt and implement tailored heightened supervisory procedures for the above topics. Firms should periodically test the integrity of their systems to ensure compliance.
Monitoring electronic communications is an incredibly effective way to find potential violations across each of the highlighted areas in the report. Utilize your archiving platform to automatically flag messages that contain risk keywords or phrases likely to warrant review. You can create lexicons focusing on areas such as fraud, high-risk brokers, improper sales practices and anti-money laundering issues. The lexicon policies can automatically find scenarios where a broker borrows money from their client and/or recommends complex products to a senior investor. Outside Business Activity Lexicon examples include: “borrow some money,” “loan cash,” “loan me money.” Lexicon policies greatly enhance your supervisory control policies and procedures, helping you meet FINRA requirements for risk-based review, as well as ensuring your reviewers only review high-risk messages.
Performing random searches of messages contributes to a well-rounded review strategy to detect potential violations and enhance your supervision process. For example, you can create queue’s and perform random searches to regularly monitor high-risk recidivist brokers. And don’t forget to document your hard work reviewing messages—it’s a great way to demonstrate to regulators that you are comprehensively supervising all activities of your associated persons. The Archiving Platform from Smarsh has built-in supervision features that can help focus on FINRA’s priority areas.
FINRA encourages firms to use it’s 2018 letter as a reference for their supervisory programs and upcoming examinations. Share the recent 2018 letter with the rest of the firm, as employees must be mindful of the findings. Provide focus training on specific topics to inform employees of prohibited practices.
FINRA has been bringing enforcement actions against firms for supervision deficiencies. Some of those enforcement actions include million dollar penalties. Just last month, FINRA fined a firm $2 million for supervision deficiencies. Firms should proactively review their programs against the 2018 Letter and take all actions necessary.
Latest posts by Marianna Shafir Esq. (see all)
- SEC Risk Alert for Most Common Compliance Violations by Brokers and Investment Advisors - September 16, 2019
- Regulatory Update: Brokers Face Personal Liability - August 15, 2019
- Connected Suite Spotlight Series – Now We’re Supervising!
Workflows and Review Queues - July 31, 2019
ARCHIVING & COMPLIANCE BLOG
Our Blog explores the news, trends and best practices in electronic recordkeeping. It’s about managing and getting value from your electronic communications data. It’s about satisfying legal and regulatory obligations. It’s all about turning compliance liability into business insight.