On January 22, 2019, the Financial Industry Regulatory Authority ("FINRA") released its Annual Risk Monitoring and Examinations Priorities Letter, which outlined its focus areas for broker-dealer examinations in 2019.
While many of these areas are carried over from the 2018 priorities, the letter also highlights new areas which the self-regulatory organization believes needs additional attention.
During its examinations, broker-dealers should expect that FINRA will review the following areas for compliance:
- Investor suitability determinations
- Outside business activities and private securities transactions
- Private placements
- Communications with the public
- Anti-money laundering (AML)
- Best execution
- Fraud (including microcap fraud), insider trading, and market manipulation
- Net capital and customer protection
- Trade and order reporting
- Data quality and governance
Risk management and supervision related to the above priorities Risks related to firm personnel having problematic regulatory histories, including broker-dealer hiring practices and supervision protocols of such "higher risk" persons received specific mention in the letter. Moreover, cybersecurity will continue to be a primary focus of FINRA examiners, who will assess the adequacy of firms' cybersecurity programs to protect sensitive information, including consumer personally identifiable information (PII).
A Problem Often Overlooked: Outside Business Activities
As outside business activities continue to be on FINRA's list of exam priorities, we'd like to encourage firms to examine their firm's operations and outside activities of broker-dealer personnel for potential conflicts of interest and whether such conflicts are disclosed and being mitigated or eliminated as a part of the firm's overall risk assessment and compliance program requirements.
Rule 3270 from the FINRA Manual states:
No registered person may be an employee, independent contractor, sole proprietor, officer, director or partner of another person, or be compensated, or have the reasonable expectation of compensation, from any other person as a result of any business activity outside the scope of the relationship with his or her member firm, unless he or she has provided prior written notice to the member, in such form as specified by the member.
Conflict of interest and proper disclosure of outside business activities is an area of compliance that has often lead to unexpected trouble for firms, and for employees, regardless of how large or small their operations may be.
Upon strict internal examination performed from a regulatory perspective, firms often find potential conflicts of interest that need to be disclosed and brought into compliance, thus avoiding regulatory scrutiny, including potential enforcement actions.
Bringing Your Firm Into Compliance - We Can Help
The release of the FINRA 2019 examination priorities provides an excellent opportunity for firms to conduct a gap analysis or mock examination focused on the early detection of areas that may be falling short of regulatory expectations. Corrective measures can then be taken.
Frequent revisions of policies and procedures help to ensure firms are in compliance and stay clear of potential enforcement actions.
JLG is available to assist you in developing an internal review process that can enable your firm to determine if corrective action is required with respect to the above examination priorities or help you with other compliance issues your firm may face.
Contact us today with related questions, or with any other industry-related legal concerns you might have.
- Managing Partner and CEO
Michelle L. Jacko, Esq. is the Managing Partner and CEO of Jacko Law Group, PC, which offers corporate and securities legal services to broker-dealers, investment advisers, investment companies, hedge/private funds and ...
Add a comment
- Investment Adviser Wearing Multiple Hats Charged by SEC for Defrauding Clients
- Charging Fees for Inactive Accounts can be as Problematic as Churning
- SEC: Prudential Failed to Disclose Conflicts of Interest to Fund Boards
- SEC Charges Investment Bank Junior Analyst with Insider Trading
- SEC Files Charges in Fraudulent Token Manipulation Scheme
- OCIE Risk Alert: Guidance for Compliance, Supervisory and Disclosure Procedures
- Jury Returns Verdict for SEC in Case Against Broker Charged with Fraudulent Excessive Trading
- SEC Charges Investment Advisor with Defrauding Clients by Failure to Disclose Conflicts of Interest
- Charging Clients Fees Not Disclosed in Form ADV: State Street Settles with SEC for $88 Million
- The CFP's Revised Code of Ethics and Standards of Conduct Takes Effect
- Policies and Procedures
- Investment Advisers
- Office of Compliance Inspections and Examinations (OCIE)
- Form U5
- Ponzi Scheme
- Advisers Act
- Aging Clients
- Regulation Best Interest
- Due Diligence
- Virtual Currency
- Dodd-Frank Act
- Transition Services
- Private Equity
- Private Funds
- Personally Identifiable Information (PII)
- Government Shutdown
- Hedge Funds
- Regulatory Examinations
- Risk Alert
- Securities Law
- Social Media Marketing
- Exchange-Traded Funds (ETFs)
- Investment Company Act
- Rule 6c
- Broker Protocol
- Wells Fargo
- Securities and Exchange Commission (SEC)