FINRA Releases 2019 Examination Priorities

FINRA recently announced its examination priorities for 2019, 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’s focus on materially new issues may help firms better identify those priorities that are relevant to their business.

Among the emerging issues identified in the letter as areas of focus in 2019 are:

1.) online distribution platforms

2.) firms’ compliance with FinCEN’s Customer Due Diligence (CDD) rule; and

3.) firms’ compliance with their mark-up or mark-down disclosure obligations on fixed income transactions with customers.

Below are summaries of FINRA’s three new areas of emphasis:

 

Online Distribution Platforms

FINRA stated that it will evaluate how firms conduct business distributing securities through on-line platforms and how they conduct their reasonable basis and customer specific suitability analyses, as well as supervise communications with the public and meet their AML requirements using such platforms. FINRA will also focus on how firms are addressing the risks presented when providing documents to the public through on-line platforms. FINRA’s stated reason that this is a priority is the assertion by some member firms that they are not selling or recommending securities when involved with online distribution platforms despite what FINRA described as “evidence to the contrary, including handling customer accounts and funds or receiving transaction based compensation.”

Customer Due Diligence and Suspicious Activity Reports

FINRA will assess firms’ compliance with FinCEN’s Customer Due Diligence (CDD) 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 their accounts, conduct ongoing monitoring of customer accounts to report and identify suspicious activities and update customer information on a risk basis. FINRA will focus on the integrity of monitoring systems, including the decisions associated with changes to those systems.

Fixed Income Mark-Up Disclosure

FINRA will review firms’ compliance with their mark-up or mark-down disclosure obligations of fixed income transactions with customers pursuant to amendments to FINRA Rule 2231 (Customer Communications) and MSRP Rule G-15. FINRA developed a mark-up/mark-down analysis report (available to firms) that provides a mark-up summary, including median and mean percentage mark-ups and other trade details, to help firms evaluate their compliance with mark-up requirements. In addition to compliance with their obligations, FINRA will also be looking for any changes in firms’ behavior to avoid mark-up/mark-down disclosure obligations.

Below is a chart comparing FINRA’s 2017, 2018 and 2019 Priorities List.


Exam Priority  2017 2018 2019
Alternative Trading System Surveillance X X
Anti-Money Laundering X  X X
Audit Trail Reporting Early Remediation Initiative and Expansion X
Best Execution X X X
Business Continuity Planning X
Credit Risk Policies, Procedures and Risk Limit Determinations X X
Cross Market and Cross-Product Manipulation X X
Culture, Conflicts of Interest and Ethics X
Customer Protection/Segregation of Client Assets X X X
Cybersecurity X X X
Data Quality and Governance X
Excessive and Short-term Trading of Long-Term Products X X X
Exchange Traded Funds (FTFs) X X
Financial Risk Management  X X
Fixed Income Mark-Up Disclosure X
Fixed Income Prime Brokerage X
Fixed Income Securities – Surveillance Program X X
High-risk and Recidivist Brokers X  X
Initial Coin Offerings and Cryptocurrencies X X
Liquidity Risk X X
Margin Loans X
Market Access Rule X X X
Microcap Fraud X X
Microcap Securities Monitoring X X
Municipal Advisor Registration X
Non-Traded REITs and Direct Participation Programs (DPPs) X
Online Distributions Platforms X
Options X X
Outside Business Activities/Private Securities Transactions X X X
Private Placements X
Product Suitability and Concentration X X X
Regulation SHO X X
Report Cards X X
Sales Practice Risks X
Securities-Baked Lines of Credit X
Senior Suitability/Suitability X X
Social Media & Electronic Communications Retention/Supervision X
Short Sales X X
Short Tenders X
Supervision, Risk Management and Controls X  X
Tick Size Pilot X
Trading Examinations X
Regulatory Technology  X