FINRA - The Year In Review
FINRA regularly examines Member Firms. Most of the time, these examinations are routine in nature and are done to ensure that Broker/Dealers are compliant with industry rules and regulations. However, when FINRA suspects that a firm has violatedsecurity industry rules, regulations, or laws, the examinations are considered to be "for cause".
Since 2017, based on Member Firm's requests for information about FINRA's findings, FINRA has been publishing an annual report on their examination findings. This information is very useful as it identifies both "best practices" that are used by Broker/Dealers, as well as, areas of concern to regulators. Firms can then tailor their Written Supervisory Procedures, and regulatory policies to maintain industry standards of operations. Hopefully these efforts will avoid "for cause" examinations and any adverse actions, that result from them.
In 2019, the name of the report was changed to better delineate FINRA's viewpoint of firms actions and activities. This year, the report is entitled "2019 Report on FINRA Examination Findings and Observations." Four distinct areas are discussed in the report, and each area has several subtopics that are of regulatory concern.
The 2019 report is unique in that it now differentiates between the types of "Findings" that appeared in both the 2017 and 2018 Reports. There is now a second category called "Observations" that appear in the 2019 Report. According to FINRA Findings "constitute a determination that a firm, or registered person has violated U.S Securities and Exchange Commission (SEC), FINRA, or other relevant rules. On the other hand, "Observations are suggestions to a firm about how it could improve its control environment in order to address perceived weaknesses that elevate risk, but do not typically rise to the level of a rule violation, or cannot be tied to an existing rule."
FINRA reviewed four major areas in 2019. These were Sales Practice and Supervision, Firm Operations, Market Integrity and Financial Management. Each of these four major areas were further broken down into subcategories. For example, for Sales Practice and Supervision, subcategories included Supervision, Suitability, Digital Communication, Anti-Money Laundering ("AML") and Uniform Transfers to Minors Act/Uniform Grants to Minors Act accounts.
The report contains only two Observations. One observation is for CyberSecurity, the other observation is for Liquidity and Credit Risk Management. The rest of the report is filled with numerous findings on all of the four major areas and their manysubcategories. That means the report represents a blueprint of things that will result in enforcement actions, fines and sanctions. Firms that concentrate on these areas and beef up their policies and procedures to adequately address and prevent any deficiencies, will be more likely to avoid adverse regulatory actions against them.
The following are some of the more noteworthy findings that resulted in adverse regulatory actions taken by FINRA in 2019:
In the area of Sales Practice and Supervision, firms had insufficient Written Supervisory Procedures for new, or amended rules, limited supervision and internal inspections, inadequate supervision of account statements and insufficient supervision for specific types of accounts. The area of Suitability found findings for inadequate supervision of product exchanges, inability to identify "red flags" for suitability, inadequate supervision for customer account information changes, limited supervision for excessive trading and churning and finally unsuitable options strategy recommendations.
Digital Communications and Anti-Money Laundering found findings for using prohibited digital channels like texting and social media, prohibited electronic sales seminars, inadequate AML transaction monitoring and over reliance on clearing firms for AML supervision.
Some of the other areas that resulted enforcement actions were incomplete and inaccurate Business Continuity Plans, inadequate reviews of "Best Execution" to ensure the best prices to customers, inadequate basis for CEO certification of management controls, omitted and inaccurate blotters, and various inaccurate Net Capital rule analysis and inadequacies.
The report also contains information that is beyond the scope of this blog and we recommend that you visit FINRA's website at finra.org, to read the report in its entirety. The FINRA website is a valuable tool for firms and is filled with information and resources to assist in all aspects of running a Broker/Dealer.
Successfully operating a brokerage firm can be a daunting undertaking. There are an almost overwhelming number of rules and requirements to take into account. And with the passing of every year, the regulators enact more and more of them. But we are here to help you. If you need any assistance, or have questions about the many areas discussed in the 2019 FINRA report, please call Forest Brokerage Advisers, Inc., to discuss them. For an ounce of prevention, is worth a pound of cure.
With the year 2019, soon in our hindsight, here's to looking forward to a rewarding, prosperous and regulatory compliant 2020!