By Scott Hoffmann, CPA, Business Assurance & Advisory Services Manager | Financial Services Industry Team
In FINRA’s 2018 annual regulatory and examination priorities letter, the broker/dealer industry regulatory agency laid out the areas of focus they will have during their 2018 examinations. Broker/dealers who are due for an examination in 2018 would be well served to use the letter in conjunction with the 2017 FINRA Examination Findings Report as points of reference to prepare for their 2018 examinations, so they can be confident that they are meeting FINRA’s expectations on these important areas. Several of the priorities listed in the report are recurring focus areas of FINRA and should be familiar to firms. Other priorities are new and are a result of 2017 examination findings, such as a new focus on initial coin offering (“ICOs”) and high-risk brokers and firms. Also in the letter, FINRA draws firms’ attention to 6 new rules that go into effect in 2018, such as FINRA Rule 2165 – Financial Exploitation of Specified Adults, which became effective February 5, 2018.
The top priority for FINRA every year is fraud prevention. In its letter, FINRA specifically mentions microcap fraud schemes and their tendency to target elderly investors as areas of focus for 2018. FINRA also details new rules that go into effect in 2018 to help prevent these types of frauds. FINRA will continue to focus on firms’ hiring and supervisory practices for high-risk brokers, including: firms’ remote supervision arrangements; supervision of point-of-sale activities, including individual broker accountability when using joint rep codes; and branch inspection programs. Also returning to the focus list is firms’ technology governance and cybersecurity. The 2017 examination findings report detailed FINRAs observations regarding concerns and effective practices related to cybersecurity.
Business Continuity Plans
A new examination priority is Business Continuity Plans (BCPs). With the effects of 2017’s hurricanes Harvey and Maria fresh on FINRA’s mind, examiners will ask about firms’ BCPs and how they address continued access to critical systems during periods when firms may not have physical access to locations. FINRA will review how and under what circumstances firms will activate their BCPs, how they classify their systems as mission-critical or secondary, how they accomplish data backup and recovery, etc. Firms should review their BCPs to make sure they are up to date before the examiners arrive.
Finally, FINRA will launch new report cards in 2018 to help firms with their compliance efforts. The Auto Execution Manipulation Report Card, the Alternative Trading System Cross Manipulation Report Card, and the Fixed Income Mark Up Report Card will become available later in 2018.
As the broker/dealer industry gets more complex and new risks arise and new products, such as cryptocurrencies, are offered, firms should stay appraised on regulatory agencies’ focuses, not only to meet examination requirements and pass the exams cleanly, but to provide the oversight and security that can help prevent fraud and abuse, and maintain client trust, in the financial services industry.
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.