FINRA 2016 Regulatory And Examination Priorities

June 3, 2016 Uncategorized

On Tuesday, January 5, 2016, the Financial Industry Regulatory Authority’s (FINRA) Regulatory and Examination Priorities Letter was released. This letter identifies new areas of focus as well as areas of concern. It addresses three broad issues–culture, conflicts of interest and ethics; supervision, risk management and controls; and liquidity. The letter focuses on manyareas of potential concern that can arise across the securities industry.

Culture, Conflicts of Interest and Ethics

While firms may have their own meaning of “firm culture,” the letter refers to the set of explicit and implicit norms, practices, and expected behaviors that influence how executives, supervisors, and their employees make decisions. In 2016, FINRA looks to formalize its assessments of firm culture while continuing its focus on conflicts of interest and ethics. It is believed that firm culture is a major influence on how a firm conducts its business and manages its conflicts of interest. FINRA does not look to dictate firm culture, but rather have an understanding of how it affects compliance and management practices at firms. FINRA will focus on the structure that firms use to develop, communicate and evaluate conformance.

FINRA will assess five indicators of a firm’s culture:

  1. Whether control functions are valued within the organization
  2. Whether policy or control breaches are tolerated
  3. Whether the organization proactively seeks to identify risk and compliance events
  4. Whether supervisors are effective role models of firm culture
  5. Whether sub-cultures that may not conform to overall corporate culture are identified

A firm’s culture is an input and product of its supervisory system. This includes a firm’s approach to identifying and managing conflicts while ensuring the ethical treatment of customers. This means that firms need to take visible actions against conflicts of interest and promote fair treatment of their customers.

Supervision, Risk Management, and Controls

FINRA’s rules create an obligation for firms to establish and maintain a system to supervise the activities of their associated persons that is designed to comply with securities laws and regulations. In 2016, FINRA will focus on four areas where it has observed repeated problems that affect firms’ business conduct and integrity of the markets: management of conflicts of interest, technology, outsourcing and anti-money laundering (AML).

FINRA’s focuses pertaining to Management of Conflicts of Interest:

  1. Incentive Structures
  2. Investment Banking and Research Business Lines
  3. Information Leakage
  4. Position Valuation

Another focus for FINRA in 2016 is firms’ supervision and risk management practices related to their technology. This includes their infrastructure, such as hardware, software, and personnel who develop and maintain these firms’ information technology systems.

FINRA’s focuses pertaining to Technology:

  1. Cybersecurity
  2. Technology Management
  3. Data Quality Governance

FINRA’s focuses on Outsourcing:

  1. Review providers of outsourced services
  2. Supervise activities
  3. Supervise for compliance with federal law and regulations
  4. Supervise qualifications to perform functions

FINRA’s focuses on AML Controls:

  1. Suspicious Activity Monitoring

a. Surveil money movements and trading activity
b. Routinely test systems
c. Verify accuracy of data sources
d. Detect and report suspicious activity

2. Microcap Securities

a. High-risk activity
b. Includes physical and electronic deposits
c. Focuses on “red flag” activities


FINRA’s focuses on Firm Funding:

  1. Firms to manage funding and liquidity risk
  2. Funding plans
  3. Evaluating liquidity needs (both marketwide and idiosyncratic stresses)
  4. Develop contingency plans
  5. Evaluating effectiveness of contingency plans

Posted by Ryan Gustafson, Esq. and Adam C. Nicolai, Esq. (Diana Nguyen contributing),

June 3, 2016