Today United Atlantic Legal Services shares FinProLaw’s discussion of FINRA’s 2022 Examination Priorities. Let us know how they did!
FINRA’s 2022 PRIORITIES
The Financial Industry Regulatory Authority (“FINRA”) issued its 2022 Report on FINRA’s Examination and Risk Monitoring Program recently. It provides the applicable rules for each topic and underlines essential factors for compliance strategies at member institutions. It also outlines findings from the most recent examination process and offers assistance to member businesses on how to examine their supervisory procedures and controls to meet their compliance requirements.
The experts at FinProLaw give an overview of the priorities with some action steps in this article.
- Private Securities Transactions and Outside Business Activities
Outside Business Activities (“OBAs”) and Private Securities Transactions (“PSTs”) disclosure obligations are another ongoing emphasis area for FINRA. Many of the exam findings from the previous year demonstrate that many registered persons are still failing to meet their requirements to notify their firms of their OBA and PST activities in writing. The findings also suggest that many businesses lack the necessary procedures to ensure that OBAs or PSTs are adhered to. These emphasis areas should be familiar to firms and their registered members, and FINRA expects to revisit them in their 2022 inspections.
- Records and Books
Another emphasis area that has been on FINRA’s attention for several years is communications archiving. Firms are generally expected to “produce and keep, in an easily accessible area, originals of all communications received and sent relevant to its business as such among other things. The regulator will continue to scrutinize the third-party vendors that firms use to hold their needed records, as well as each firm’s policies and procedures for keeping books and records in the future.
- Contact Persons
FINRA Rule 4512(a)(1)(F) (“Customer Account Information”) requires companies to make a reasonable attempt to collect the name and contact information of a trusted contact person (“TCP”) age 18 or older for each of their non-institutional customer accounts. This also defines the circumstances under which firms and their connected persons are permitted to contact the TCP and share customer account information. FINRA will assess firms’ Written Supervisory Procedures (“WSPs”) during exams to ensure that a plan for getting contact information for TCPs is in place.
- Anti-Money Laundering
Money laundering is one of these persistent challenges. FINRA will continue to focus on member firms’ documented anti-money laundering (“AML”) policies, which must be reasonably intended to conform with the Bank Secrecy Act (“BSA”) and its implementing rules. Throughout examinations, member firms must also demonstrate that they have formed and enacted policies, procedures, and internal controls that can reasonably be expected to identify and cause the reporting of suspicious activity; conduct an annual independent test of their AML program; and provide additional training for the relevant person.
- Technology Governance and Cybersecurity
Cybersecurity threats are one of the most significant hazards that businesses and their clients face. FINRA saw an increase in the volume and sophistication of these types of attacks over the previous year and issued multiple alerts of its own, warning firms about a series of phishing emails purporting to be from FINRA. Firms are needed to establish a procedure for regularly monitoring cybersecurity and technology risks to mitigate cyber-related risks. Furthermore, companies must include thorough cybersecurity and phishing-specific training in their annual training programs.
- Form CRS and Regulation BI
FINRA assessed member firms’ implementation of Regulation Best Interest (“Reg BI”) and Form CRS-related responsibilities for the first full calendar year in 2021. FINRA noticed that some firms were falling behind on these duties during this time. Insufficient WSPs for Reg BI and Form CRS, insufficient staff training, failure to comply with the Care Obligation and the Conflict of Interest Obligation, improper use of the terms “advisor” or “adviser,” insufficient Reg BI disclosures, and more were among the most prominent findings. Needless to say, FINRA’s next inspections will continue to focus heavily on Reg BI and Form CRS.
- Public Relations and Information
Firms must communicate with the public in a fair, balanced, and non-misleading manner, according to FINRA guidelines. The importance of these standards in the context of digital asset communications, mobile apps, and municipal securities communications was noted by FINRA in the Report. FINRA has found that many firms include false, misleading, and inaccurate information in mobile apps, have deficient communications for promoting digital assets, have misrepresentations in cash management account communications, and have insufficient supervision and recordkeeping of digital communications, among other things, in previous examinations. Firms should take these and other things into account when engaging with the public in 2022.
- Execution
In any payment for or with a client or a customer of another broker-dealer, a member firm and persons associated with a member firm must use reasonable diligence to ascertain the best market for the subject security and buy or sell in that market so that the subsequent price to the customer is as favorable as possible under prevailing market conditions, according to FINRA Rule 5310 (“Best Execution and Interpositioning”). Where a firm chooses not to undertake an order-by-order review, it must have mechanisms in place to ensure it conducts “frequent and rigorous” reviews of the execution quality of its customers’ orders regularly, following Rule 5310 and related guidelines.
Conclusion
FINRA is focusing in 2022 on investor protection and market integrity in light of this growth. Retail investor protection issues, as well as other developing phenomena like crypto, Reg BI enforcement, and responses to hybrid work practices, will be a recurring theme. Financial services have been changed by the digital world, with a new group of investors more able to engage with financial institutions at the touch of a smartphone screen.
Firms should analyze the priorities concerning their business operations carefully to identify potential gaps and/or opportunities for improvement in their compliance programs and supervisory processes.
FINRA’s observations aren’t a complete list of what regulators will look for during examinations. It is critical to identify the risk areas relevant to a firm’s business activities and assess the compliance policies that have been implemented to meet applicable rules and regulations as part of a firm’s 2022 planning. At the very least, the prioritized list will serve as a benchmark against which enterprises can assess the efficiency of their controls in addressing critical regulatory areas.
References for personal use
About the Author
Michael Rasmussen is the founder of United Atlantic Legal Services. He is a licensed attorney in Florida and registered solicitor in the United Kingdom. Michael has acted as General Counsel and Chief Compliance Officer to several investment advisers, including private fund managers, responsible for the management of billions of dollars in client assets.
Michael is also the founder of FinProLaw, an online learning platform where Michael has created courses designed for investment adviser compliance professionals. These courses include:
- Investment Adviser Compliance Essential for Chief Compliance Officers
- Foundations of Investment Adviser Compliance
- What is a “Security”?
- Investment Adviser Marketing Rule
- Regulation A – Exemption from Registration
- Regulation Crowdfunding – Exemption from Registration
- Regulation D – Exemption from Registration
Michael can also be found on LinkedIn.
Investment adviser firms who are also clients of United Atlantic Legal Services can receive many of these courses at a significantly reduced fee or, in some cases, at no expense. Contact us today or visit the FinProLaw to learn more.