By Brad Rosen, J.D.
FINRA has provided member firms with a compliance road map for the year ahead with the release of its 2017 Regulatory and Examination Priorities Letter. As in past years, the letter focuses on “core blocking and tackling issues of compliance, supervision, risk management” matters as noted in introductory comments by FINRA President and CEO, Robert Cook. Cook took the helm at FINRA in August of last year after spending many years as a partner in the securities practice at Cleary, Gottlieb, Steen and Hamilton.
Cook explained, “[a]ttention to core regulatory requirements identified in the letter—and how to address them in light of new business challenges and market developments—will serve investors and markets well.” The letter describes five areas of concerns where the FINRA will focus its attention this year.
High-risk and recidivist brokers. In dealing with the industry’s bad apples (or those with propensities to become bad apples), FINRA said it will “devote particular attention to firms’ hiring and monitoring of high-risk and recidivist brokers including whether firms establish appropriate supervisory and compliance controls for such persons.” Toward this end, the regulator has already formed a dedicated examination unit to identify and examine high-risk brokers. It has also beefed up examination protocols to review firm procedures for the hiring and subsequent supervision these type of brokers.
Sales practices. Protecting seniors will remain one of FINRA’s main priorities, especially with regard to selling the elderly complex or inappropriately risky products. The regulator will also be on the lookout for fraud in connection with penny stocks or microcaps, an area where seniors are often targeted by unscrupulous operators and especially vulnerable. Other issues on FINRA’s radar include product suitability, excessive and short-term trading, outside business activities, as well as emerging social media practices and electronic communications.
Financial risks. Last year, FINRA identified firms that lacked liquidity risk management plans, failed to conduct stress tests, failed to use sufficiently rigorous assumptions in their stress tests, or that failed to maintain sufficient sources of funding. Accordingly, the regulator will step up efforts to review firm funding and liquidity plans, and whether firms have adequately assessed their liquidity requirements in light of applicable stresses
Operational risks. Not surprisingly, FINRA view cybersecurity threats as one of the most significant risks many firms face in 2017. Accordingly, the regulator may scrutinize controls firms use to monitor and protect customer data as well as examining controls to protect sensitive information from insider threats. FINRA also sees the need for member firms to enhance controls related to the use of passwords, encryption of data, use of portable storage devices, as well as the physical security of assets and data.
Market integrity. Deterring and detecting manipulation remains a critical priority for FINRA and it will continue to provide members with tools and guidance to address these problems. The regulator is also committed to assuring that members comply with best order execution obligations, and maintain and monitor controls around market access.
The examination and priorities letter provides FINRA members and other industry participants with a useful window into the thinking and likely actions of examiners as the 2017 exam cycle starts. It also promotes an ongoing dialogue between the regulator and the regulated with the ultimate goal of furthering FINRA’s mission of investor protection and market integrity.