FINRA 2023 Exam and Risk Monitoring Report with Bates Comparison Chart and Summary – Prioritizing the Priorities
In its 2023?annual report?on examinations and risk monitoring, FINRA provides its latest overview of firm compliance obligations.?Divided into five discrete topical categories—financial crimes (a new breakout category this year), firm operations, communications and sales, market integrity, and financial management—FINRA’s priorities are further delineated into numerous subcategories. The Annual Report includes findings and observations from the recent oversight activities of FINRA’s Member Supervision, Market Regulation, and Enforcement programs, and:
As always, FINRA encourages member firms to use the Annual Report (and its other published resources) to, among other things, (i) assess the applicability of the provided information to a firm’s business model; (ii) incorporate relevant topics into firm risk assessments; (iii) identify gaps in existing compliance programs; and (iv) improve training. The 24 substantive subcategories offer up important guidance. In this article, Bates summarizes FINRA’s 2023 Annual Report priorities. Our?annual chart?offers insight into how newly observed risks have added to and affected those priorities year over year.
The Annual Report identifies FINRA’s top examination priorities for member firms:
[1]?FINRA’s considerations are intended to serve as a possible starting point in considering a firm’s compliance program related to a topic. Firms should review relevant rules to understand the full scope of their obligations.
[2]?In an upcoming article, Bates will take a deeper look at FINRA’s observations from its compliance reviews on each of the core duties under the two-year-old rule, including addressing the care in handling recommendations, conflicts of interest, required disclosure of material facts to retail clients, establishment of supervisory policies and procedures, and matters regarding Form CRS preparation.
Top Areas of FINRA Focus for 2023
See highlights of FINRA’s continuing and emerging concerns on our annual comparison chart below, which keeps track of articulated priorities from year to year. (Items highlighted in gold are new for 2023; summary continues after chart.)
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New Format and New Topics
The Annual Report lists member firm compliance obligations by topic now under five categories.?Financial crimes, the newest category, incorporates previous sub-topics (e.g.,?cybersecurity?and?technology governance?under SEC Regulation S-P) concerning compliance policies and procedures to safeguard customer records and information, as well as FINRA rules on business continuity planning and supervision.
This new category also incorporates “anti-money laundering, fraud and sanctions” obligations concerning policies and procedures required under FINRA rules (e.g., detection, suspicious activity reporting, testing, training, and customer due diligence) for compliance under the Bank Secrecy Act (BSA) and its implementing regulations (e.g., maintaining a Customer Identification Program (CIP); verifying the identity of legal entity customers; etc.).?The Report notes that member firms should stay apprised of progress being made to implement the Anti-Money Laundering Act of 2020.
A new sub-topic for FINRA, under the category?financial crimes, focuses on?manipulative trading, which implicates rules on impermissible trading practices (e.g., use of deceptive devices, publication of transactions and quotations, order entry and execution practices.) The new sub-topic also emphasizes supervisory obligations to ensure a process for the review of securities transactions “reasonably designed to identify trades that may violate the Exchange Act, SEC rules or FINRA rules prohibiting insider trading and manipulative and deceptive devices.”
At the SIFMA luncheon, FINRA’s Ruppert discussed manipulative trading and what prompted the change. He shared that there is an increase in wash sales and front running activity. He suggested that member firms look at manipulative trading from the perspective of behavioral analytics, starting with alerts and complaints and looking for commonalities in the data, including, for example, common phone numbers, IP addresses, and branches used. He emphasized the importance of "stepping up controls, investigative work, SARs, risk monitoring, and reach-outs to FINRA.”
The remaining new sub-topics fall under the general category?of?market integrity?and include FINRA rules on (i)?fixed income?and?fair pricing?that apply to transactions (including fixed income and municipals) generally requiring that a dealer charging a mark-up or mark-down do so based on the prevailing market price; (ii) reporting and order handling of fractional shares; and (iii) short sale and closeout requirement exceptions for bona fide market making activity.
Conclusion
FINRA’s Annual Report?provides important guidance for compliance officers. This latest Annual Report reinforces the reach and depth of FINRA’s rules and brings to light practices member firms can consider for maintaining effective compliance programs.
Last year, Bates recommended that member firm compliance reviews shift from an annual review to ongoing reviews.?In that light, this year’s Annual Report illustrates FINRA’s continuing efforts to guide compliance officers in navigating the expanding set of rules. As new developments arise, Bates will keep you apprised.
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