By John M. Jascob, J.D., LL.M.
FINRA has highlighted online distribution platforms, fixed-income mark-up disclosures, and compliance with FinCEN’s Customer Due Diligence (CDD) as areas of focus for its risk monitoring and examination programs in the coming year. In its 2019 Risk Monitoring and Examination Priorities Letter, FINRA describes topics that member broker-dealers should consider as they seek to improve their compliance and risk management programs.
“This year’s Priorities Letter takes a new approach by highlighting those topics that will be materially new areas of focus for our risk monitoring and examination programs in the coming year,” said FINRA CEO Robert Cook in a news release. “[W]e agree with the suggestion from many of our member firms that a sharper focus on emerging issues will help them better determine whether those issues are relevant to their businesses and how they should be addressed.”
FINRA has also broadened the scope of the letter over those in previous years to include more explicitly its priorities for risk monitoring. Unlike previous letters, FINRA has not repeated topics that have been the mainstays of FINRA’s attention over the years.
Online distribution platforms. The letter notes that broker-dealers are increasingly involved in the distribution of securities through online platforms in reliance on Rule 506(c) of Regulation D and Regulation A. Some of these platforms are operated by unregistered entities that may use FINRA member firms as selling agents or brokers of record, or to perform custodial, escrow, and back-office functions.
FINRA is concerned that some member firms are asserting that they are not selling or recommending securities when involved with online distribution platforms despite evidence to the contrary, including handling customer accounts and funds, or receiving transaction-based compensation. FINRA will evaluate how firms conduct their suitability analyses, supervise communications with the public, and meet AML requirements. FINRA will also evaluate how firms are addressing the risk of offering documents or communications with the public that omit material information or may contain false or misleading statements, among other things.
Fixed income mark-up disclosure. FINRA will review firms’ compliance with their mark-up or mark-down disclosure obligations on fixed income transactions with customers under the amendments to FINRA Rule 2232 (Customer Confirmations) and MSRB Rule G-15, which became effective on May 14, 2018. FINRA will also look for any changes in firms’ behavior that might have been undertaken to avoid their mark-up and mark-down disclosure obligations.
Operational risks. FINRA stated that it will assess broker-dealers' compliance with FinCEN’s Customer Due Diligence rule, which became effective on May 11, 2018. The CDD rule requires that firms identify beneficial owners of legal entity customers, understand the nature and purpose of customer accounts, conduct ongoing monitoring of customer accounts to identify and report suspicious transactions and, on a risk basis, update customer information. FINRA will focus on the data integrity of those suspicious activity monitoring systems, as well as the decisions associated with changes to those systems.
FINRA will also review firms’ activities related to digital assets and assess firms’ compliance with applicable securities laws and their efforts to mitigate the risks associated with these activities. FINRA will coordinate with the SEC to consider how firms determine whether a digital asset is a security and whether firms have implemented adequate controls to ensure compliance with rules related to the marketing, sale, execution, control, clearance, recordkeeping and valuation of digital assets, as well as AML/Bank Secrecy Act rules and regulations.