The holidays have passed but the gifts keep coming from FINRA with the release of the 2016 Examination Priorities letter. While most of the areas of focus are the same as 2015, some areas of interest a broker-dealer should be aware of in the release include:
Conflicts of Interests and Risk Management – Here FINRA will be looking at how broker-dealer assess potential risks and conflicts of interests that can exist including those created through relationship with affiliates, vendors or through outside business activities. This review will include how the broker-dealer assesses the potential for conflicts when unregistered persons not affiliated with the firm may potentially have access to confidential information on the firm, its business or its clients as well as how the firm deals with more internal conflicts such as relationship with its affiliates or the activities representatives are engaged in away from the broker-dealer.
Outsourcing – A topic of examinations and notices, outsourcing continues to be a priority for examiner, not because the regulators don’t want firms to outsource where they can but to ensure broker-dealers are conducting due diligence and risk assessment of the service providers and their technology where applicable both prior to contracting and periodically throughout the engagement. In addition, where third-parties are engaged to perform activities normally performed within the firm itself, the FINRA examiner will be looking at how the firm supervises the persons conducting these activities as well as how the firm verifies the activities are being done in accordance with the broker-dealer’s policies and applicable rules.
Culture – FINRA has for many years discussed the need for broker-dealer to have a culture of compliance so, in conjunction with reviews of the broker-dealer’s process for identifying and mitigating potential conflicts, examiners are going to try to assess the overall culture within the firm including the relationships between compliance, senior management and business line supervisors. This will include a focus on the processes, procedures and infrastructure broker-dealers use to develop, communicate and evaluate how people adapt and conform to the culture.
Ethics – This area of review encompasses not only ethical treatment of customers by the broker-dealer and its representative but also the ethical behavior of the representative in the relationship with the broker-dealer and vice versa.
Technology and Cybersecurity – With the increasing risk of cyberattacks on financial institutions and the SEC increased FOCUS, FINRA is also take a hard look at the technology infrastructure of broker-dealer and assess whether the broker-dealer understands it potential risks, has evaluated the types of information could lost or breached, steps the firm has taken to mitigate such risks and steps the firm would take if a breach were to occur.
Other areas of focus will including financial control and liquidity, sales practice and suitability considerations surrounding complex products, AML, and compliance with market integrity regulations such as the market access rule, Regulation SHO and cross-market or cross-product manipulation.
More information regarding the FINRA examination priorities can be found by visiting http://www.finra.org/industry/2016-regulatory-and-examination-priorities-letter or by contacting one of the consultants at Regulatory Compliance and National Compliance Services.