FINRA recently announced its examination priorities for 2020, highlighting new priorities as well as identifying areas of ongoing concern that FINRA will continue to review in the coming year. This year’s letter focused on broker-dealers’ compliance with the Securities and Exchange Commission’s (SEC) Regulation Best Interest (Reg BI) and the Customer Relationship Summary, or Form CRS.
FINRA will be reviewing firms’ preparedness for Reg BI in the first half of 2020 to gain an understanding of implementation challenges they may face. After the June 30, 2020 compliance date, FINRA will begin examining firms’ compliance with Reg BI, Form CRS and related SEC guidance and interpretations.
Among other issues identified in the 2020 priorities letter are:
Communications With The Public
In addition to ongoing review for compliance with FINRA’s Communications with the Public rule, the self-regulator will also be assessing how firms review, approve, supervise and distribute retail communications regarding private placement securities via online distribution platforms, as well as traditional channels.
Firms use of digital communication channels, such as texting, messaging, social media or collaboration applications, will also be reviewed, as they may pose challenges to firms’ ability to comply with mandatory record reviews and retention.
Cash Management And Bank Sweep Programs
FINRA may take the following factors into consideration when reviewing firm’s Bank Sweep Programs:
1.) Does your firm clearly communicate the nature of the sweep arrangement?
2.) Does your firm clearly communicate the alternatives for cash management available to customers, the terms provided by the Bank Sweep Program and any alternatives?
3.) Has your firm incorrectly implied that a brokerage account is similar to or the same as a “checking and savings account” at a bank?
4.) Has your firm incorrectly implied that the brokerage accounts themselves are bank deposit accounts insured by the Federal Deposit Insurance Corporation (FDIC)?
Direct Market Access Controls
FINRA may take the following factors, among others, into consideration when reviewing your firm’s direct market access controls:
1.) If your firm is highly automated, how does it manage and deploy technology changes for systems associated with market access, and what controls does it use, such as kill switches, to monitor and respond to aberrant behavior by trading algorithms or other impactful market wide events?
2.) How does your firm make adjustments to credit limit thresholds for institutional customers (whether temporary or permanent)?
3.) Does your firm use any automated controls to timely revert ad hoc credit limit adjustments?
4.) And more
FINRA reaffirms the importance of firms’ compliance with their best execution obligations. FINRA will focus on whether firms use reasonable diligence to determine whether their customer order flow is directed to the best market given the size and types of orders, the terms and conditions of orders, and other factors as required by FINRA Rule 5310 (Best Execution and Interpositioning), focusing on: 1.) Routing Decisions 2.) Odd-Lot Handling 3.) S. Treasury Securities 4.) Options.
Disclosure Of Order Routing Information
FINRA may take the following into consideration when reviewing firms’ compliance with amended Rule 606:
1.) Does your firm use the required layout and format and include all components of the detailed customer-specific not held order reports required by Rule 606(b)(3)?
2.) What policies and procedures does your firm have in place to address the accuracy and timeliness of published reports?
3.) If your firm claims an exemption from providing not held order reports required by Rule 606(b)(4) or (5), what policies and procedures does it have in place to determine if customers’ order activity falls below the relevant reporting thresholds?
4.) And more!
As firms leverage technology for their business systems and infrastructure, as well as engaging with customers and business partners, cybersecurity has become an increasingly large operational risk. Firms should expect that FINRA will thoroughly assess whether their policies and procedures are reasonably designed to protect customer records and information consistent with Regulation S-P Rule 30. FINRA recognizes that there is no one-size-fits-all approach to cybersecurity, but expects firms to implement controls appropriate to their business model and scale of operations.
Below is a chart comparing FINRA’S 2018, 2019 AND 2020 Priority Lists.
|Alternative Trading System Surveillance||X||X|
|Business Continuity Planning||X|
|Cash Management and Bank Sweep Programs||X|
|Contractual Commitment Arising From Underwriting Activities||X|
|Communications with the Public||X|
|Credit Risk Policies, Procedures and Risk Limit Determinations||X|
|Cross Market and Cross-Product Manipulation||X|
|Culture, Conflicts of Interest and Ethics||X|
|Customer Protection/Segregation of Client Assets||X||X|
|Data Quality and Governance||X|
|Direct Market Access Controls||X|
|Disclosure of Order Routing Information||X|
|Excessive and Short-term Trading of Long-Term Products||X||X|
|Exchange Traded Funds (FTFs)||X|
|Financial Risk Management||X||X|
|Fixed Income Mark-Up Disclosure||X|
|Fixed Income Prime Brokerage||X|
|Fixed Income Securities – Surveillance Program||X|
|High-risk and Recidivist Brokers||X|
|Initial Coin Offerings and Cryptocurrencies||X||X|
|London Interbank Offered Rate (LIBOR) Transition||X|
|Market Access Rule||X||X|
|Microcap Securities Monitoring||X|
|Online Distributions Platforms||X|
|Outside Business Activities/Private Securities Transactions||X||X|
|Product Suitability and Concentration||X||X|
|Regulation Best Interest (Reg BI) and Form CRS||X|
|Sales of Initial Public Offerings (IPOs) Shares||X|
|Sales Practice Risks||X||X|
|Securities-Baked Lines of Credit||X|
|Social Media & Electronic Communications Retention/Supervision||X|
|Supervision, Risk Management and Controls||X|
|Vendor Display Rule||X|