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Finra Will Be Watching These Broker Activities with Eagle Eyes in 2019

By Rita Raagas De Ramos January 23, 2019

Finra released Tuesday its 2019 Risk Monitoring and Examination Priorities Letter, a go-to document for brokers who want to identify and prepare for the self-regulator’s main concerns – and therefore, what it will be keeping a close eye on – for the year.

The self-regulator highlighted three emerging issues as its focus areas for 2019:

  • online distribution platforms;
  • firms’ compliance with the Financial Crimes Enforcement Network’s Customer Due Diligence rule; and
  • firms’ compliance with their mark-up or mark-down disclosure obligations on fixed-income transactions with customers.

"This year’s Priorities Letter takes a new approach by highlighting those topics that will be materially new areas of focus for our risk monitoring and examination programs in the coming year," Finra CEO Robert Cook says in the letter.

"While we will continue to review and examine for longstanding priorities discussed in greater detail in past letters, we agree with the suggestion from many of our member firms that a sharper focus on emerging issues will help them better determine whether those issues are relevant to their businesses and how they should be addressed,” he adds.

First, Finra notes that firms are becoming more involved in the distribution of securities through online platforms. While some online distribution platforms are owned and operated by broker-dealer firms, others are operated by unregistered entities that may use member firms as selling agents or brokers of record, or to perform activities such as custodial, escrow, back-office and financial technology related functions, according to Finra.

The letter highlights that Finra is “concerned that some member firms assert they are not selling or recommending securities when involved with online distribution platforms despite evidence to the contrary, including handling customer accounts and funds, or receiving transaction-based compensation.”

Finra plans to evaluate how firms conduct their reasonable basis and customer-specific suitability analyses, supervise communications with the public and meet anti-money laundering requirements.

Second, Finra says it will assess firms’ compliance with FinCEN’s CDD rule, which requires firms to identify beneficial owners of legal entity customers, understand the nature and purpose of customer accounts, conduct ongoing monitoring of customer accounts to identify and report suspicious transactions and, on a risk basis, update customer information.

Finra says it will focus on the data integrity of those suspicious activity monitoring systems and the decisions associated with changes to those systems.

Third, Finra says it will review firms’ compliance with their mark-up or mark-down disclosure obligations on fixed-income transactions with customers. Finra says it will also review for changes in firms’ behavior that might be undertaken to avoid their mark-up and mark-down disclosure obligations.

Finra will also continue to review for firms’ compliance in important focus areas identified in previous years, including sales practice risks; hiring and supervision of associated persons with a problematic regulatory history; cybersecurity; and fraud, insider trading and manipulation across markets and products.

The annual letter itself has taken on a different title, having previously been called the Regulatory (instead of Risk Monitoring) and Examination Priorities Letter.

Robert Cook (Getty)

Cook says in the letter that the new title reflects Finra’s risk monitoring priorities. Finra’s risk monitoring analysis enables it to evaluate whether a regulatory response is appropriate, determine what that response should be and then allocate the required resources to implement the response, according to Cook.

The risk monitoring process involves “numerous inputs,” including firms’ reporting to Finra, data from market and member surveillance programs, findings from examinations, Finra surveys and questionnaires, and ongoing dialogue between Finra and the industry as well as other stakeholders, Cook says.

While risk monitoring, examinations and enforcement are Finra’s core regulatory tools, Cook stresses they are not the only tools available to the self-regulator.

Cook cites examples of tools used in 2018, including: providing broad examination feedback to all firms through the issuance of Finra’s Report on Examination Findings; helping educate firms on new regulatory issues, such as through a report on Technology Based Innovations for Regulatory Compliance in the Securities Industry and the Report on Selected Cybersecurity Practices – 2018; and soliciting firms’ views on how Finra can support financial technology innovation through a Special Notice on Financial Technology Innovation. Other examples of changes made or underway were summarized in the FINRA360 Progress Report, Cook adds.

Finra expects to continue to implement targeted regulatory responses to address specific risk and compliance issues in a variety of ways, according to Cook. For example, Finra recently held a conference on regulatory technology to provide firms with insights into how technology is being used to strengthen firms’ compliance programs.

Cook says Finra will also continue to enhance its market surveillance to incorporate new data and address new market practices.