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Gap Analysis | FINRA Letter 2015
The document outlines FINRA's key examination priorities for 2015, emphasizing compliance, supervision, and risk control in financial firms. It highlights the need for timely responses to regulatory inquiries, proper training for registered representatives, and the importance of cybersecurity and funding risk management. Additionally, the document calls attention to monitoring trading technologies and abusive algorithms as critical for maintaining market integrity.
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Gap Analysis | FINRA Letter 2015
- 1. RND Resources, Inc Compliance Registration Accounting FINRA 2015 Exam Priorities Letter Los Angeles | New York (818) 657-0288
- 2. FINRA Concerns Recurring Challenges LessonsLearned Breakdown in Compliance Supervisory Supervision & Risk Control Lagging Firm Culture Putting Customers First > > > more Conflicts of Interest Product Offerings Compliance | Registration | Audit (818) 657-0288
- 3. 2015KeyAreas ofFocus Sales Practices Financial& Operational Priorities Market Integrity Important issue … an increasing number of situations where firms repeatedly fail to provide timely responses to requests made in connection with examinations and investigations. FINRA is flexible with respect to due dates, rolling productions, scope & format, as long as integrity of the regulatory matter is not compromised. FINRA reiterates each firms obligation to respond to inquiries in a full & timely fashion. Compliance | Registration | Audit | RND Resources Inc. (818) 657-0288
- 4. DisclosureSuitabilityDue Diligence > >> moreTrainingSupervision Focus on Product Related Risk Reviews Registered Representatives should be attentive to changing circumstances Training about product features, pricing and valuation Providing guidance around suitability Describe product risks in a balanced manner that retail investors can understand (818) 657-0288Compliance | Registration | Audit | RND Resources Inc.
- 5. Firms and registeredrepresentatives should be attentive to changing circumstances. A rapid fall in emerging markets or frontier market indices may affect suitability decisions. Providing registered representatives with guidance around suitability is an important step in meeting new challenges. FINRA’s 2015 surveillance and examination activities will include product-related risk reviews and routinely focus on due diligence, suitability, disclosure, and supervision. Compliance | Registration | Audit| RND Resources Inc. (818) 657-0288
- 6. Products Supervision Rules Rollovers &Wealth Events Excessive Trading Private Placements Senior Investors Anti-Money Laundering Recidivist Brokers Discounts and Waivers Municipal Securities Compliance | Registration | Audit| RND Resources Inc. (818) 657-0288
- 7. CyberSecurity Exempt & FDIC InsuredSales Funding & Liquidity Disclosing Information Timely Reporting Outsourcing Highlighted topics Monitor funding and liquidity risk management FINRA will examine the integrity & valuation of mark-to-market related transactions CyberSecurity risk management program BD responsibility of Outsourced activities (818) 657-0288Compliance | Registration | Audit| RND Resources Inc.
- 8. Broker-dealers need todevelop and monitor funding and liquidity risk management programs. Testing should include review of marks-to-market for illiquid securities and the valuation process. Review the creation and resolution of short positions, including possession and control requirements as well as supervisory processes in place. In 2015 FINRA examiners will review firms’ approaches to ensuring record storage is secure. The 2015 FINRA CyberSecurity report addresses principles and effective practices for cyber-security programs. FINRA will also focus on compliance with SEC rules regarding electronic data storage. FINRA will include an analysis of the due diligence and risk assessment a firm performs on service providers, as well as ongoing supervision of service providers. Ultimately data responsibility in outsourced services rests upon the broker-dealer firm. Compliance | Registration | Audit | RND Resources Inc. (818) 657-0288
- 9. 2015AreasofFocus 3 Key Areas TradingTechnology Abusive Algorithms Audit Trail Integrity Review technology procedures for supervisory processes with an emphasis toward development and testing of technologies. FINRA views abusive algorithms and deficient supervision as a potential for manipulation and contributing to one of the biggest risks of market integrity. Surveillance programs will continue to be enhanced to detect manipulative trading schemes. With a focus on late filing issues, a new team has been developed to focus on identifying equity audit trail issues not typically detected through routine sweeps. Compliance | Registration | Audit | RND Resources Inc. (818) 657-0288
- 10. RND Resources, Inc.specializes in regulatory compliance consulting and can help determine how an exam might apply to your organization. Yield Compliance | Registration | Audit | RND Resources Inc. (818) 657-0288
- 11. Compliance | Registration| Audit | RND Resources Inc. (818) 657-0288 www.finracompliance.com
Editor's Notes
- #2 The 2015 FINRA Regulatory and Examinations letter is a roadmap for broker-dealers to understand the actions they should take to reduce regulatory risk in 2015. Some topics are easy to address, others appear more difficult and restrictive. This presentation takes a look at highlighted topics and shows you where regulatory standards are headed for 2015.
- #3 FINRA noticed positive changes where firms have improved integration of business functions with independent perspectives, such as compliance and risk management, documenting decisions, and articulating standards. Further, markets have become more transparent to retail investors with regards to trade reporting. Financial firms should take notice that FINRA’s examination program is nowadays more risk-based, which enables them to expand their resources allocated to high risk firms. FINRA is also sharing more information across regulators, to improve their regulatory success. Five areas remain a concern for FINRA, as these activities compromise integrity to quality of service. Not Putting customer interests first; a Weak or lagging firm culture; Weak supervision and risk management controls; Complex product offerings with insufficient disclosure information; and Failure to report conflicts of interest.
- #4 Areas of Focus for improvement in 2015 are related to: Sales Practices, Financial and Operational Priorities, and Market Integrity. Specifically, FINRA has expressed concern regarding failure of timely reporting, citing there are a number of firms repeatedly failing to respond to requests made in connection with examinations and investigations. FINRA is flexible with regards to due dates, but must preserve investor protection. Look for stronger consequences for untimely reporting in the future.
- #5 FINRA is always concerned with customer suitability analysis and examines training and supervision standards to ensure product risks are described in a balanced manner. Specific products listed in the 2015 report are; Interest Rate-Sensitive Fixed Income Securities, Variable Annuities, Non-Traded Real Estate Investment Trusts, Exchange-Traded Products, and Structured Retail Products. New to the report are a discussion of Floating-Rate Bank Funds with regards to credit and call risk; Securities-Backed Lines of Credit and how they’re marketed; IRA Rollovers and “wealth events” where objectivity and suitability are compromised, Alternative Mutual Funds with regards to how they perform in various market scenarios.
- #6 FINRA’s 2015 surveillance and examination activities will include product-related risk reviews and routinely focus on due diligence, suitability, disclosure, and supervision. Firms and registered representatives should be attentive to changing circumstances. A rapid fall in emerging markets or frontier market indices may affect suitability decisions. Provide registered representatives with guidance around suitability is an important step in meeting new challenges.
- #7 New supervision rules became effective December 1, 2014. The rules modify requirements related to: 1) supervision, supervisory jurisdiction, and inspection of non-branch offices; 2) managing conflicts of interest in the supervisory system; 3) performing risk-based reviews of investment banking and securities transactions; 4) carrying-out risk-based reviews of investment banking and securities transactions; 5) monitoring insider trading and conducting internal investigations; 6) testing supervisory controls. Firms will be questioned by regulators in their approach to handling these new rule requirements.
- #8 Broker-dealers are expected to develop and monitor funding and liquidity risk management programs. FINRA cites risk in observing at times that a firms funding and liquidity plan relies on being able to sell or enter re-purchase transactions near prices at which the firm has marked their inventory to market. Thus, they will increase concern with mark-to-market transactions. Cyber Security is a growing threat to financial investment firms, and FINRA is taking a stronger stand on guidelines and practices for risk governance. Look for effective practices in developing and implementing cyber-security programs with respect to identifying critical assets and the overall approach to risk assessment and control.
- #9 Need help with audits or financial and operational compliance? RND Resources Inc, is a leading full service Securities Brokerage Consulting firm with over 25 years of experience. We employ veteran compliance and registration specialists, CPA’s, MBA’s, and FINRA experienced examiners to handle audit and regulatory needs of our clients. We can customize a support program that fits the firm. Many firms find outsourcing the compliance and registration process saves time and money in identifying and resolving issues. For more information about what we can do to help, call (818) 657-0288, or download our services brochure: http://www.finracompliance.com/wp-content/uploads/2012/06/RND-Resources-Services-Book-Apr2015.pdf
- #10 Modern technology presents a problem in that it adds greater potential for misconduct, where abusive algorithms, advances in technology, and changes in market structure, leave investors at a higher level of risk. In response, FINRA is adapting its surveillance program to identify market misconduct. Firms must also be more vigilant in detecting and preventing poor conduct. As such, firms are the uniquely positioned as first level of defense in their ability to identify bad actors through analysis of activities on their systems.
- #11 As a full service firm, RND Resources is capable of handling all regulatory challenges and are committed to the success of our clients. We’ve served over 300 securities professionals from broker-dealers, investment advisers, hedge funds, municipal advisers, commodity trading advisers, and futures commission merchants. Additionally, we conduct regular training and webinars covering pressing industry topics to keep financial professionals informed and on top of compliance requirements.
- #12 Our CPA’s are PCAOB registered and subject to inspections to conduct audits of securities brokers. They’re also a member of AICPA and the California State Board of Accountancy. RND Resources, Inc has been specializing in serving financial professionals since 1984. Additional services we can provide include; part-time FINOP services, Litigation support and expert witness testimony, Assurance services, Auditing, CyberSecurity Compliance, and Succession Planning to guide firms during change of ownership. Download a copy of our services brochure here: http://www.finracompliance.com/wp-content/uploads/2012/06/RND-Resources-Services-Book-Apr2015.pdf