Examinations and Audits | FINRA | Supervision

Protecting Seniors, High Risk Brokers and Excessive Trading Top FINRA’s 2017 Priorities List

In its Annual Regulatory and Exam Priorities for 2017,  FINRA asserts that it “has enhanced its risk-based surveillance and examination program to apply a nationally consistent approach to identify and focus on material conduct based on its assessment of specified sales practice, financial, operational, and market-integrity risks.”   Electronic off-site reviews will be introduced this year as a “supplement” to the traditional on-site cycle exams, aimed at firms that are not scheduled for a cycle exam in 2017.

High-risk and Recidivist Brokers is this year’s headliner.  This risk continues to be a hot topic for FINRA in 2017, as evidenced by the recent establishment of an examination group specifically charged with identifying and examining high-risk brokers.  Not only is FINRA focused on the review of the brokers’ activities, but it will also be examining supervisory procedures for the hiring, retaining, and supervision of recidivist brokers.  Firms should conduct the necessary background checks on applicants, verify the completeness and accuracy of Form U4 information, and develop heightened supervision plans to monitor the activities of these brokers.

The protection of Senior Investors remains a top priority this year.  Examiners will review firms’ policies and procedures designed to protect senior investors from, “fraud, abuse and improper advice.”  Firms should enhance existing procedures to detect and prevent sales practice violations, specifically the sale of unsuitable investments and microcap fraud schemes.

Product Suitability and Concentration and Outside Business Activities and Private Securities Transactions made the list once again, with a focus on supervision of such activities.  FINRA added Excessive and Short-term Trading of Long-term Products to its specified risks. FINRA is interested in supervisory procedures to monitor for short-term trading of long-term products in client accounts.

Liquidity tops the Financial Risks for 2017.  Based on prior examination findings, FINRA intends to review and assess the adequacy of firms’ funding and liquidity plans. Financial Risk Management makes the list this year as FINRA will be asking firms to respond to a stress scenario affecting the firms’ market, credit and liquidity risks.  The regulator is interested in firms’ readiness, communication plans, risk metrics and triggers, and contingencies. New in 2017, FINRA will assess firms’ written procedures to monitor and comply with FINRA Rule 4210 regarding margin requirements for covered agency transactions.

No surprise that Cybersecurity gets top billing for Operational Risks.  FINRA exams will focus on cybersecurity controls at branch offices.  Supervisory Controls Testing, Customer Protection/Segregation of Client Assets, Regulation SHO, AML, and Municipal Advisor Registration are also listed as operational risk focus items this year.

With regards to Market Integrity Risks, be prepared to discuss with FINRA your firm’s policies and surveillance procedures to detect and deter manipulation, determine Best Execution, and many more.

The theme of the letter is that examinations will expand beyond the high-risk activity itself but focus on firms’ supervisory control procedures over such activities.