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2020 FINRA and SEC Exam Priorities
- 1. Quest CE © 2020 Preparing for FINRA and the SEC’s 2020 Exam Priorities
- 2. Quest CE © 2020 Overview of the SEC’s 2020 Exam Priorities Areas of Focus: • Retail investors; • Market infrastructure; • Information security; • Focus areas relating to investment advisors, investment companies, broker- dealers and municipal advisors; • Anti-money laundering programs • Fintech & innovation, including digital assets and electronic investment advice • FINRA and MSRB
- 3. Quest CE © 2020 The SEC by the Numbers The SEC’s Footprint on the RIA Space: • SEC oversees more than 13,475 RIAs • AUM of RIAs increased from $62 trillion to $84 trillion over the past five years • Appx. 15% of RIAs were examined in 2019 (this number is down from 2018)
- 4. Quest CE © 2020 SEC 2019 Examination Findings 2019 Examinations Led To: • More than 2,000 deficiency letters issued; • 150 enforcement referrals; • Resulted in more than $70 million returned to investors and; • More referrals could still be recovered from FY 2019 30 additional referrals and $13M in recoveries in FY 2019 came from exams that were completed in FY 2018.
- 5. Quest CE © 2020 SEC’s Leading Focus Areas for 2020 Focusing on Specifically on: • Dually-registered • Effectiveness of Compliance o Best execution o Prohibited transactions o Fiduciary advice o Disclosure of conflicts • Use third-party asset managers to advise clients • Accuracy of disclosures concerning new types on investment strategies
- 6. Quest CE © 2020 New and emerging areas and ongoing priorities: 2020 FINRA Annual Risk Monitoring and Examination Priorities Letter • Sales Practice and Supervision o Regulation Best Interest and Form CRS • Market Integrity • Financial Management • Firm Operations
- 7. Quest CE © 2020 New and Emerging Examination Priorities Regulation Best Interest: • “Best Interest” standard of conduct for BDs when they make securities-related recommendations to retail clients • First half of 2020 o Reviewing firms’ preparedness for the upcoming Reg BI implementation • After June 30, 2020 o Compliance with Reg BI, Form CRS & related SEC guidance & interpretations
- 8. Quest CE © 2020 New and Emerging Examination Priorities Regulation Best Interest • Valuable questions posed by FINRA: o Does your firm consider the express new elements of care, skill and costs when making recommendations? o Does your firm consider reasonably available alternatives to the recommendation? • Best interest doesn’t always mean the “cheapest option available” • Look to see which, if any, alternatives were available
- 9. Quest CE © 2020 New Areas of Focus for 2020 Financial Risk Management Programs • Digital assets • Liquidity management • Contractual commitment arising from underwriting activities • London Interbank Offered Rate (LIBOR) transition
- 10. Quest CE © 2020 Examination Preparation Tips (1) Conduct a conflict inventory (2) Review prior regulatory deficiency letters (3) Review prior internal and external reviews (4) Consider new regulations – especially this year Assess Potential Enterprise Risks: (5) Consider any changes in your business activities (6) Make note of customer complaints and allegations of wrongdoing (7) Conduct a risk assessment (8) Gather evidence to illustrate that your compliance program is dynamic
Editor's Notes
- Good Morning, and Thank you for joining me on today’s webinar covering the FINRA and SEC’s recently released examination priorities.
- Ok, to get started let’s discuss the SEC and their announcement on January 7th of their examination priorities The staff of the Office of Compliance Inspections and Examinations (OCIE) of outlined seven key areas: 1. Retail investors, including seniors and those saving for retirement 2. Market infrastructure 3. Information Security 4. Focus areas relating to Investment Advisers, Investment Companies, Broker-Dealers, and Municipal Advisors 5. Anti-Money Laundering Programs 6. Fintech & Innovation, Including Digital Assets and Electronic Investment Advice 7. FINRA and MSRB
- Per the examination priorities, the SEC oversees more than 13,475 registered investment advisers, and the AUM of these firms increased from $62 trillion to $84 trillion over the past 5 years. It was reported that approximately 15% of registered investment advisers were examined last year. How many of you were examined by the SEC last year? Please raise your hand. This is actually down from the prior year at 17% coverage. While the SEC will continue to make improvements in overall efficiency, they are stating they do not have enough resources to adequately cover the RIA space. The coverage rate will most likely not keep up the RIA growth and complexity. In the fiscal year 2019, the SEC highlights significant rulemaking and interpretations which include new Regulation Best Interest, the new Form CRS Relationship Summary and two separate interpretations under the Advisers Act which will all be the focus on exams in 2020.
- In the fiscal year 2019, the SEC Examinations led to more than 2,000 deficiency letters, 150 enforcement referrals and resulted in firms returning more than $70 million to investors.
- If we narrow the SEC focus down to some specifics they are looking at : RIAs that are dually-registered as a broker-dealer, or affiliated with a broker-dealer or have supervised persons who are associated with unaffiliated broker-dealers. And, looking at the effectiveness of compliance in addressing risks relating to best execution, prohibited transactions, fiduciary advice and disclosure of conflicts; Also, they are looking at firms that use third-party asset managers to advise clients' investments, and will evaluate the RIAs' due diligence practices and policies and procedures; The SEC is also concerned with the accuracy of disclosures concerning new types of investment strategies, such as ESG investing
- On January 9, 2020, FINRA, released its “Risk Monitoring and Examination Priorities Letter” for 2020. A number of FINRA’s hot topics for 2020 aligned with the SEC exam priorities. One striking change in this year’s priorities letter is FINRA’s focus on providing guidance to firms through providing practical considerations and questions that firms should be focused on as they review their program for compliance with regulatory requirements. Typically, the letters have just been a detailed description of issues and requirements. IF you all could help me out, in 2019 were you examined by FINRA? Please raise your hand!
- FINRA’s 2020 Risk Monitoring and Examination Priorities Letter includes a list of factors FINRA may consider when reviewing firms for compliance with Reg BI. Notably, FINRA will be reviewing firms’ preparedness for Reg BI in the first half of 2020 to gain an understanding of implementation challenges they may face. After the June 30, 2020 compliance date, FINRA will begin examining firms’ compliance with Reg BI, Form CRS and related SEC guidance and interpretations.
- FINRA posed two questions that are valuable to review: o Do your firm and your associated persons consider the express new elements of care, skill and costs when making recommendations to retail customers? o Do your firm and your associated persons consider reasonably available alternatives to the recommendation? Both FINRA and the SEC have been explicit in their guidance that the Best Interest standard does not always mean the cheapest option available. That said, cost is a factor and the specific question regarding whether “reasonably available alternatives” will be an important consideration for firms. The regulators will be looking at what alternatives were available to firms to offer their customers and, if a firm chooses not to make those available, it will be important to ensure that there their review, assessment, and determinations are fully documented. Let’s expand here a bit on Reg BI, and look at the most recent FAQ release update from the SEC. REG BI COURSE DROP CARLY
- Firms can expect FINRA to continue its focus on compliance programs relating to Exchange Act Rule 15c3-3 (Customer Protection Rule) and Exchange Act Rule 15c3-1 (Net Capital Rule), as well as firms’ overall financial risk management programs. FINRA has identified the following new areas of focus for 2020: o Digital assets; o Liquidity management; o Contractual commitment arising from underwriting activities; and o London Interbank Offered Rate (LIBOR) transition.
- Whether you are being examined by FINRA or the SEC, some good preparation tips actually start before they even begin the exam by being proactive in putting together good compliant policies, training and a firm culture of compliance. Assess potential enterprise risks in these areas: 1. Conduct a Conflict Inventory - Detecting and mitigating conflicts is one of the most important steps toward unveiling potential problems that the regulators will focus on during an examination. 2. Review prior regulatory deficiency letters: Deficiencies noted in your prior examinations typically require attention. Make sure that all were addressed. 3. Review prior internal and external reviews: It is important to periodically check your annual reviews, internal/external audits, and consultant reviews to ensure all recommendations were adequately addressed. If there are still open items, then progress should be documented, and an expected completion date should be included. 4. Consider new regulations especially this year: Determine whether the firm needs to develop new policies and procedures or enhance existing processes. 5. Consider any changes in your business activities: Changes in your business model might suggest a need to revise your current policies and procedures. 6. Make note of customer complaints and allegations of wrongdoing: Be sure that your internal controls and procedures cover how the firm addresses such notifications and complaints and establish heightened supervision controls, as needed. 7. Conduct a risk assessment: Risk assessments help to identify what gaps exist within the firm's compliance program. It is important to make sure that the firm is able to discuss what gaps, if any, may exist. 8. Gather evidence to illustrate that your compliance program is dynamic: Consider the development of a report to reflect all the steps you have taken to educate staff, as well as the chief compliance officer (CCO), about ongoing compliance requirements and append training that may have occurred over the examination period. Diligent preparation, excellent communication, and professionalism are the keys to a successful examination and by reviewing your priority letters, risk alerts and other notices will aid in a compliant firm. Ok Carly, what do we have for compliance priorities, this will also help us in developing content and the ACM modules this year for clients.