FYI: FINRA has issued its 2019 Annual Risk Monitoring and Examination Priorities Letter, outlining areas of emphasis for FINRA’s risk monitoring and examination program for broker-dealers in the coming year. Among the most interesting areas identified were:
NEW AREAS OF FOCUS
• Online distribution platforms (especially firms/platforms involved in the online distribution of privately placed securities).
• Regulatory technology (aiming to understand how firms are using RegTech tools to address risks, challenges or regulatory concerns in areas such as supervision and governance, third-party vendor management, safeguarding customer data and cybersecurity).
• Senior investors (specifically looking at heightened supervision imposed by firms when their reps are acting in a fiduciary capacity, including holding a power of attorney, acting as a trustee or co-trustee, or having some type of beneficiary relationship with a non-familial customer account).
• Supervision of digital assets business (including how firms determine whether a particular digital asset is a security and whether firms have implemented adequate controls and supervision over compliance with rules related to the marketing, sale, execution, control, clearance, recordkeeping and valuation of digital assets, as well as AML/Bank Secrecy Act rules and regulations).
• Customer due diligence and suspicious activity reviews (including firms’ compliance with FinCEN’s Customer Due Diligence rule, which became effective on May 11, 2018, and requires that firms identify beneficial owners of legal entity customers, understand the nature and purpose of customer accounts, conduct ongoing monitoring of customer accounts to identify and report suspicious transactions and, on a risk basis, update customer information).
ON-GOING AREAS OF FOCUS
• Suitability determinations, including with respect to complex products, mutual fund and variable annuities share classes, senior investors and recommendations to use margin or execute trades in a margin account.
• Outside business activities and private securities transactions.
• Private placements.
• Communications with the public.
• Anti-money laundering (AML).
• Best execution.
• Fraud (including microcap fraud), insider trading and market manipulation.
• Net capital and customer protection.
• Trade and order reporting.
• Data quality and governance.
• Recordkeeping, risk management and supervision related to these and other areas.
The full 2019 FINRA Priorities Letter can be accessed here: http://www.finra.org/industry/2019-annual-risk-monitoring-and-examination-priorities-letter.
Additional resources were cited in/linked to FINRA’s priorities letter, which may be of interest to all types of financial services firms, including:
• FINRA’s December 2018 Report on Examination Findings: http://www.finra.org/sites/default/files/2018_exam_findings.pdf (identifying areas that are proving to be of particular difficulty for broker-dealers in terms of compliance).
• FINRA’s September 2018 RegTech Report: http://www.finra.org/sites/default/files/2018_RegTech_Report.pdf (how firms are and can use new and innovative technology to address regulatory obligations).
• FINRA’s December 2018 Report on Selected Cybersecurity Practices: http://www.finra.org/sites/default/files/Cybersecurity_Report_2018.pdf (chock full of specific ideas on techniques/methods/approaches that firms are using to address cyber issues; includes an Appendix that specifically addresses controls for small firms).
• FINRA’s July 2018 Notice on Financial Technology Innovation: http://www.finra.org/sites/default/files/Special-Notice-073018.pdf (in which FINRA seeks comment on how it can support FinTech development consistent with its mission, and considering issues such as the provision of data aggregation services, supervisory processes concerning the use of artificial intelligence, and the development of a taxonomy-based machine-readable rulebook).
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