FINRA Issues 2019 Exam Priorities

Financial Institutions Law Alert

FINRA has announced its Risk Monitoring and Exam priorities for 2019, highlighting new priorities as well as identifying areas of ongoing concern that FINRA will continue to focus on in the coming year. While many of 2019’s focus areas are largely the same as in 2018 (sales practice risks, senior investors, cybersecurity, fraud, and market manipulation), FINRA announced it is shifting its focus to include three new areas of concern:

  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.

FINRA also emphasized that it is including in its scope of announced priorities its risk monitoring program. Risk monitoring is the ongoing process through which FINRA monitors developments at firms across the industry to identify risks. The risk monitoring process involves reporting data to FINRA, member surveillance programs, findings from examinations and FINRA surveys. Thus, member firms can expect to receive continued expanded inquiries as a part of FINRA’s risk monitoring program.

FINRA’s announcement emphasizes that member firms should consider using FINRA’s priorities to identify opportunities to improve their compliance, supervisory and risk management programs.

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 how firms 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 offering 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.

SEC 2019 Priorities
The SEC also recently issued its 2019 Exam Priorities letter. Comparing the SEC’s priorities with FINRA’s 2019 letter reveals common themes that will be critical for member firms in the coming year. Both letters identify senior investors as a top priority a with a focus on how member firms supervise senior and retirement investor accounts. In addition, the SEC and FINRA both identify cybersecurity and digital assets as a priority for 2019, highlighting collaborative efforts between FINRA and the SEC on evaluating whether certain digital assets are “securities” and how member firms maintain safety of client assets and client identifying information with these emerging products.

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

FINRA expects that firms will incorporate the guidance from the 2019 letter and prior letters into their compliance, supervisory and risk programs. A copy of the 2019 letter is available here.