We handle nationwide litigation and arbitration involving, among others, broker-dealers and registered representatives. To avoid an investigation before it arises, it is important to be aware of the priorities of regulators. Every January, FINRA puts out an annual letter identifying its priorities and areas of focus in the coming year. This short article provides an overview of FINRA’s 2019 Risk Monitoring and Examination Priorities Letter (the “Priorities Letter”).
FINRA's Focus for 2019
In its letter, FINRA identified three new priorities and addressed several areas that it continues to monitor closely for compliance. FINRA’s three new priorities are online distribution platforms, fixed income mark-up disclosure, and regulatory technology.
Firms should also expect in 2019 that FINRA will continue to focus on areas of ongoing concern, including:
- Suitability determinations;
- Anti-money laundering (“AML”);
- Persons with problematic regulatory histories; and
- A firm’s cybersecurity program and the protection of sensitive data.
FINRA's Three New Areas of Concern
Online Distribution Platforms
Firms have increasingly used online platforms in their businesses. FINRA is concerned about broker-dealers making representations that they are not selling or recommending securities involved with online distribution platforms when the facts indicate otherwise. Accordingly, FINRA intends to, among other things, evaluate how firms conduct their suitability analyses, meet AML requirements, and address the risks of potentially misleading offering documents for securities distributed through online platforms.
Fixed Income Mark-Up Disclosure
FINRA will review member firms’ compliance with their mark-up or mark-down disclosure obligations under the amendment to FINRA Rule 2322 and MSRB Rule G-15, as well as conduct that a broker-dealer takes to avoid these obligations. To assist firms with compliance, FINRA developed a Mark-up/Mark-down Analysis Report.
Because firms have been utilizing regulatory technology or “RegTech” to help their businesses more efficiently comply with their obligations, FINRA plans to work with such firms to understand how they are using this technology and addressing the risks that arise, such as cybersecurity, protecting customer information, and vendor management.
Examples of FINRA's Continuing Priorities
Suitability remains one of FINRA’s highest priorities in 2019 and it intends to primarily focus on 1) deficient suitability determinations or supervisory controls; 2) the overconcentration in illiquid securities (e.g., variable annuities and alternative investments sold through private placements); and 3) recommendations to purchase and/or hold securities that are inconsistent with a customer’s time horizon or the security’s performance characteristics.
FINRA’s Priorities Letter specifically addresses novel and complex Exchange-Traded Products (“ETPs”), and how it plans to evaluate whether firms are satisfying their suitability and risk disclosure obligations with these types of products, including leveraged and inverse Exchange-Traded Funds (“ETFs”), and floating-rate loan ETFs. FINRA is also concerned about the sale to retail customers of ETPs involving leveraged loans (e.g., collateralized loan obligations).
In its Priorities Letter, FINRA identified the protection of senior investors from fraud, sales practice abuses, and financial exploitation as a top priority. FINRA is particularly concerned about registered representatives acting in a fiduciary capacity (e.g., trustee) and misdirecting funds and assets to themselves.
Outside Business Activities
FINRA will continue to examine firm oversight of registered persons’ outside business activities and private securities transactions, such as the raising of customer funds away from firm supervision. FINRA highlighted its concern about fundraising activities for outside companies in which they control or have an interest, especially when those companies have misleading names similar to established firms.
Anti-Money Laundering Concerns
Although FINRA did not devote a section of the Priorities Letter to AML, it discussed various AML concerns in the context of other subjects. For example, FINRA will monitor whether firms identify the beneficial owners of legal entity customers, such as limited liability companies, and assess the adequacy of a broker-dealer’s suspicious activity reporting.
If your organization is facing FINRA challenges, contact us today for assistance. If you would like one of our experienced FINRA litigation attorneys to speak at your organization's event, contact Mary Madden to schedule a presentation for your group.