• FINRA’s 2015 Exam Priorities
  • March 10, 2015 | Author: Thomas K. Potter
  • Law Firm: Burr & Forman LLP - Nashville Office
  • The Financial Industry Regulatory Authority (“FINRA”) released its 10th annual Exam Priority Letter earlier this week (Jan. 6, 2015). The so-called “Errico Letter” advises broker-dealer member firms of the operational risks the regulator expects to focus on in its examination (and enforcement) program.

    Moving a little closer to a principles-based regulatory approach than the usual “hot issue” laundry list from past years, this year’s Letter first addresses five key areas of concern:

    1. Alignment of Customer/Firm Interest
    2. Standards of Ethical Behavior
    3. Strong Supervisory and Risk-Management Behavior
    4. Marketing and Sale of Novel Products;
    5. Management of Conflicts of Interest.
    FINRA continues to include perennial favorites, including Seniors, Variable Annuities, Exchange Traded Products (though calling out especially those pegged to alternate weightings or indices), Non-Traded REITs, Recidivist/High-Risk Brokers and, of course, Churning (n/k/a “quantitative suitability” under new FINRA Rule 2111.05, effective May 2014).

    Among the risks to watch for 2015, keep a special eye on:
    • Anti-Money Laundering (“AML”) - especially firm’s customer due-diligence, surveillance systems and response to “red-flag” events with special emphasis on cash-management (“CMA”) and delivery- / receipt- versus payment (“DVP/RVP”) accounts.
    • Cyber Security - An increasingly high-profile issue, Cyber Security will continue to be a focus for FINRA, which expects to publish soon the results of its 2014 examination sweep on the subject. The SEC’s Office of Compliance Inspection and Examination (“OCIE”) also recently said it may release some of its findings on the subject.
    • Outsourcing - As cost pressures continue to drive outsourcing of many functions within the industry, regulators will continue to examine firms to ensure they maintain responsibility for regulatory compliance and supervision of external service providers.
    • Trading Technology, Algo’s & Cross-Market Activity - FINRA noted early last year that it would increase its focus on trading, alternative markets, and market manipulation issues in and around the high-frequency trading space. FINRA has renewed that emphasis for 2015, especially calling out algorithmic trading (including abusive algorithms and supervision) and attempts to disguise market manipulation by trading across markets or products.