FINRA'S EXAMINATION AND RISK MONITORING PROGRAM FOR 2021
If you own, or work in a Broker/Dealer, you know that sooner, or later, either FINRA, the Securities and Exchange Commission ("SEC"), or a State Securities Regulator, will eventually examine the Broker/Dealer that you are associated with. While the SEC and State Regulators don't have regularly scheduled examinations for brokerage firms, FINRA will have cycle examinations for each and every Broker/Dealer that is a Member Firm.
Have you ever wondered what FINRA, or other regulators will be looking for when they come to examine your Broker/Dealer. Well you need not wonder any longer. In February 2021, FINRA published its Report on 2021 Risk Monitoring and Examination Activities. This report gives every member firm both an analysis of prior examination reports, as well as, the examination areas FINRA plans to concentrate on in the future year.
The 2021 Report can be found at finra.org. This website is a very valuable tool and we will devote several future blogs to it. While we will discuss some of the highlights of the Report in this blog, time and space limitations prevent us from talking about it in its entirety. We therefore encourage you to visit FINRA's website and read the 2021 Report in its entirety
Four major categories are discussed in the Report. These are Firm Operations, Communications and Sales, Market Integrity and Financial Management. Every Broker/Dealer should have effective policies and Written Supervisory Procedures that address these four major areas and their related sub areas, such as Anti Money Laundering ("AML"), Books and Records, Private Placements, Market Access, Net Capital and Liquidity Management.
In addition to the four major categories, FINRA also identified six highlighted areas that affect compliance programs for many member firms. These are Regulation Best Interest and Form CRS, the Consolidated Audit Trail, Cyber Security, Communications with the Public, Best Execution and Variable Annuities. It is a pretty good bet that FINRA will concentrate on some, or all of these areas during your firm's next cycle examination
Now that we are aware of some of the major areas that FINRA and the SEC will concentrate on during an examination, how do we comply with their requirements? You can have all of the best policies in place and top notch Written Supervisory Procedures to rely on, but effective compliance depends on a good system of supervision together with a system of ongoing training for Registered Representatives and Associated Persons.
The Report is very useful in providing supervisory guidance as well. Effective practices from recent FINRA exams are noted. New findings and emerging trends are noted as well. Of course, every Broker/Dealer is different, so it is important to interpret the information contained in the Report, in the context of your particular business model, when you evaluate your compliance program.
Also included in the Report is an Appendix, which briefly shares how to use the exam findings to enhance your compliance programs. Eight areas are identified. These are:
Assessment of Applicability - Basically reviewing the findings, observations and practices and identifying those that specifically pertain to your business.
Risk Assessment - Incorporating the topics into your risk assessment process as you perform your compliance reviews.
Gap Analysis - Identifying "gaps" in your current policies and Written Supervisory Procedures against the areas identified and discussed in the Report.
Project Team - Developing a Team comprised of members of different departments to address and implement continuing and new procedures.
Circulation to Compliance Groups - Communicating relevant sections of the Report to your compliance departments.
Presentation to Business Leaders - Communicating with senior management.
Guidance - Sharing newsletters, sites and knowledge with associated persons.
Training - Educating associated person through Firm Element sessions and other training methods.
While the 2021 Report covers many areas and provides needed guidance, often firms can benefit from outside assistance. Sometimes, a fresh set of eyes and the "voice of experience" can see and tell you the things you are not. Operating a Broker/Dealer can be very rewarding, yet at the same time it is an exacting, highly regulated business. A slight misstep on your part, can be very costly and permanent. Forest Brokerage Advisers, Inc., can assist you with your next FINRA examination. We have been helping Broker/Dealers and Registered Investment Advisers operate successfully for over 34 years.