The Financial Industry Regulatory Authority (FINRA) is a government-authorized not-for-profit organization that oversees U.S. broker-dealers to ensure that everyone can participate in the market with confidence. Every year, FINRA publishes its areas of focus for the ongoing execution of its mission to protect investors and market integrity.
FINRA’s 2020 Risk Monitoring and Examination Priorities Letter cites new areas of emphasis in what promises to be a year of change in terms of the alignment of examination resources. All FINRA member firms have been grouped into one of five main firm business models: Retail, Capital Markets, Carrying and Clearing, Trading and Execution, and Diversified.
Most important, each firm will be assigned a single point of accountability, a senior leader who has ultimate responsibility for the ongoing risk monitoring, risk assessment, planning, and scoping of examinations tailored to the risks of the firm’s business activities.
Here’s a checklist broker-dealers might find helpful in 2020 as it relates to FINRA:
Sales Practices and Supervision
The sales practices of such complex products as variable annuities and private placements will continue to merit FINRA’s attention, especially as they relate to senior investors. FINRA also will be monitoring the implementation of Regulation Best Interest (Reg BI), a new standard of conduct adopted by the Securities and Exchange Commission last June for broker-dealers and associated persons when they make a recommendation to a retail customer of any security or investment strategy involving securities.
Broker-dealers must provide a brief relationship summary – Form CRS – to retail investors and be in compliance with Reg BI by June 30, 2020. Now’s the time for firms to take an internal audit of procedures and training to make certain it can meet the best interest standard and express new elements of care, skill, and costs when making recommendations to retail customers.
Communication via Digital Media
The increased use of texting, messaging, and other social media can place a strain on a firm’s ability to comply with the obligations related to the review and retention of such communications.
It’s important to have policies, processes, and procedures in place when it comes to evaluating and assessing the use and supervision of digital communications. FINRA almost certainly will ask whether your firm is periodically testing its systems to ensure all communications are being captured for review and retention.
Your firm’s supervisors should be familiar with the “red flags” that should be kept in mind during routine reviews to determine if communications are being conducted through unapproved channels.
- Trading Authorization
FINRA is placing an increased emphasis on making certain a firm has the proper procedures and controls in place when it comes to exercising discretion without written authorization from the client, as required under FINRA Rule 3260 (Discretionary Accounts).
With that in mind, your firm should review how it checks for potential red flags in the area of registered reps exercising discretion without written client authorization. And if a red flag is identified, what follow-up steps does your firm have in place to further investigate them?
FINRA has seen an increase in the number of firms seeking to engage in the offering of digital assets such as cryptocurrency. This is a controversial area that will undergo ongoing scrutiny, so make certain your firm has filed a Continuing Member Application (CMA) if it’s considering an involvement with digital asset activities. All marketing materials and retail communications also must provide a fair and balanced presentation, including addressing investment risk.
FINRA is interested in every firm’s Business Continuity Plan as it relates to whether sufficient policies and procedures are in place to safeguard client records and information.
One of the most important things FINRA wants to know is how your firm will maintain client access to their funds and prevent delays and/or inaccuracies in the event of a BCP event.
How would your firm fare in FINRA’s 2020 areas of focus? Keep in mind it’s far easier to prevent a problem than fix one. JLG assists firms and individuals in meeting FINRA requirements. For more information, contact our team of attorneys today.