This year, FINRA will focus its regulatory efforts on the broad categories of supervision, risk management and controls, and liquidity in the new year. In a 2016 Regulatory and Examination Priorities Letter, FINRA stated that it will also concentrate on “firm culture, conflicts of interest and ethics, and the significant role each of these plays in the way a firm conducts its business.” FINRA emphasized that that these priorities include (i) sales practices, (ii) financial and operational controls, and (iii) market integrity.
FINRA highlighted its approach to these priorities:
- Culture, Conflicts of Interest and Ethics: A firm’s culture is both an input to and a product of its supervisory system. It affects the firm’s approach to identifying and managing conflicts of interest, and ensuring the ethical treatment of customers.
- Supervision, Risk Management and Controls: FINRA will focus on four areas: (i) management of conflicts of interest, (ii) technology, (iii) outsourcing and (iv) anti-money laundering.
- Liquidity: FINRA will review the adequacy of firms’ contingency funding plans in light of their business models (FINRA Regulatory Notice 15-33).
Regarding other areas of regulatory focus, FINRA stated:
- Suitability and Concentration: FINRA will assess whether registered representatives that sell fixed-income, complex and alternative products are considering certain factors adequately, such as credit risk, duration and leverage.
- Financial and Operational Controls: FINRA will monitor firms’ policies and controls concerning (i) market-maker net capital exemptions, (ii) exchange-traded funds, (iii) fixed-income prime brokerages, (iv) internal audit frameworks, (v) onboarding clients and correspondents, and (vi) the transmittal of customer funds.
- Market Integrity: FINRA will review firms’ (i) compliance with Rule 603(c) (“Distribution, Consolidation and Display of Information with Respect to Quotations for and Transactions in NMS Stocks”) of Regulation NMS (“Regulation of National Market System”) (FINRA Regulatory Notice 15-52),(ii) compliance “report cards” derived from FINRA’s cross-market equity manipulation surveillance program, (iii) fixed-income order handling, markups and related controls, (iv) compliance with Regulation SHO (“Regulation of Short Sales”), (v) cross-market and cross-product manipulation, and (vi) audit trail integrity.
As to its overall approach to firm culture, FINRA Chair and CEO Richard Ketchum said: “Our goal is not to dictate a specific culture, but rather to understand how each firm’s culture affects compliance and risk management practices. Firms with a strong ethical culture and senior leaders who set the right tone, lead by example, and impose consequences on anyone who violates the firm’s cultural norms are essential to restoring investor confidence and trust in the securities industry.”