One January 6, the Financial Industry Regulatory Authority issued its annual letter to FINRA member firms outlining FINRA’s regulatory and examination priorities for the coming year.
In the letter, FINRA indicated that it has identified challenges in the following five general areas that have contributed to compliance and supervisory issues at member firms: (1) putting customer interests first; (2) firm culture; (3) supervision, risk management, and controls; (5) product and service offerings; and (4) conflicts of interest. FINRA suggested that addressing these challenges will enable its member firms to get ahead of many of the concerns raised in the letter.
FINRA’s 2015 priorities will focus on key sales practices—both financial and operational—and market integrity matters. With respect to sales practices, FINRA raised product-related concerns regarding features of the products themselves as well as sales or distribution practices. FINRA specified the following products that have raised sales practice concerns: (1) interest rate-sensitive fixed income securities; (2) variable annuities; (3) alternative mutual funds (or liquid alts); (4) non-traded real estate investment trusts; (5) exchange-traded products tracking alternatively weighted indices; (6) structured retail products; (7) floating-rate bank loan funds; and (8) securities-backed lines of credit. FINRA indicated that its 2015 surveillance and examination activities that include product-related risk reviews will routinely focus on due diligence, suitability, disclosure, supervision and training. FINRA also highlighted its new supervision rules (FINRA Rules 3110, 3120, 3150 and 3170) that modify requirements relating to, among other things: (1) supervising offices of supervisory jurisdiction and inspecting non-branch offices; (2) managing conflicts of interest in a firm’s supervisory system; (3) performing risk-based reviews of correspondence and internal communications; (4) conducting risk-based reviews of investment banking and securities transactions; (5) monitoring for insider trading, conducting internal investigations and reporting related information to FINRA; and (6) testing and verifying supervisory control procedures.
FINRA also is focused on the controls that firms have in place related to wealth events (such as an inheritance, life insurance payout, sale of a business or other major asset, divorce settlement or an IRA rollover), with an emphasis on firms’ compliance with their supervisory, suitability and disclosure obligations. IRAs were specifically cited in the letter as a part of FINRA’s focus.
Additionally, FINRA stated in the letter that private placements will continue to be an area of focus in 2015 and, in particular, inadequate due diligence and suitability analysis by member firms with respect to private placements. Other areas of focus raised in the letter deal with excessive trading and concentration controls, sales charge discounts and waivers, senior investors, and anti-money laundering, among others. In 2015, FINRA examiners will also be focused on reviewing firms’ approaches to cybersecurity risk management, including their governance structures and processes for conducting risk assessments and addressing the output of those assessments. Furthermore, FINRA continues to be concerned with trading technology and is adapting its surveillance program to identify potentially violative conduct made possible by advances in technology and changes in market structure.
In the letter, FINRA also highlighted an issue regarding responses to FINRA information requests. Specifically, FINRA has experienced an increasing number of situations where some firms have repeatedly failed to provide timely responses to information requests made in connection with examinations and investigations. FINRA reiterated firms’ obligation to respond to FINRA inquiries in a full and timely fashion, and cautioned firms that production failures expose firms to disciplinary action.
FINRA’s letter is available here.
