Episode 37: FINRA 2019 Exam Priorities

On episode 37 of the CCO Buzz we discuss some key points regarding the newly released 2019 FINRA Examination Priorities.

 

(INTRO MUSIC)

CCO Buzz: Good Morning! I hope your Valentine’s Day was filled with love, laughs and good company! Coincidentally, we here at the CCO buzz have great company for episode 37 because we have Core Compliance’s Compliance Consultant Adam Stutz. Adam will be discussing some key points regarding FINRA’s 2019 Examination Priorities.

Adam Stutz: FINRA released its 2019 Annual Risk Monitoring and Examination Priorities Letter on January 22, 2019, which highlights several new and ongoing exam priorities including:

  • Online Distribution Platforms
  • Sales Practice Risks, including:
    • Suitability
    • Senior Investors, and
    • Outside Business Activities and Private Securities Transactions
  • Operational Risks, including:
    • Supervision of Digital Assets Business; and,
    • Customer Due Diligence and Suspicious Activity Reviews
  • Market Risks, including:
    • Best Execution
    • Market Manipulation
    • Market Access
    • Short Sales
    • Short Tenders
  • Financial Risks, including:
    • Credit Risk
    • Funding and Liquidity

CCO Buzz: Wow, that’s a bit take in. Where should our listeners start?

Adam Stutz: Well, today I’d like to focus on the sales practice risks areas of the examination priorities:

Suitability

Suitability continues to be one of FINRA’s top exam priorities. This year’s exams will focus on (1) deficient quantitative suitability determinations or related supervisory controls; (2) overconcentration in illiquid securities, such as variable annuities, non-traded alternative investments and securities sold through private placements; and (3) recommendations to purchase share classes that are not in line with the customer’s investment time horizon or hold for a period that is inconsistent with the security’s performance characteristics (which could include, for example, a recommendation to purchase and hold a security that is intended for short-term trading or to engage in short-term trading in products designed primarily for long-term holding). FINRA is also concerned about securities products that include leveraged loans that are typically sold to qualified institutional buyers, which has prompted them to review how firms are supervising these transactions.

Next, let’s look at Senior Investors

Protection of senior investors and investors who are retiring or approaching retirement, remains a top priority for FINRA. FINRA will review firms’ supervision of accounts where registered representatives serve 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 an unrelated customer account. FINRA is especially concerned about registered representatives using their role as a fiduciary to take control of trusts or other assets and direct funds to themselves. FINRA will assess the supervisory systems firms employ to place heightened scrutiny over such accounts. FINRA will also review firms’ controls regarding their obligations under amendments to FINRA Rule 4512 (Customer Account Information) requiring firms to make reasonable efforts to obtain information about trusted contacts for non-institutional accounts and new FINRA Rule 2165 (Financial Exploitation of Specified Adults), to the extent that firms anticipate placing temporary holds on disbursements pursuant to the Rule 2165 safe harbor, including whether firms have clearly defined policies and procedures or practices.

Last, let’s look at Outside Business Activities and Private Securities Transactions

FINRA will continue to assess firms’ controls related to associated persons’ outside business activities and private securities transactions, including associated persons raising funds from their customers away from their firm and outside of their firm’s supervision. FINRA is concerned about fundraising activities for entities that the associated persons control or in which they have an interest, specifically entities with potentially misleading names that are like established issuers

The FINRA exam priorities are an important tool for FINRA members to use to prepare for their examinations, guide their risk assessments, and revise and update their written supervisory procedures. Using the priorities as a template, CCOs can be well-prepared for their next exam and strengthen their existing compliance programs. To obtain a copy of FINRA’s exam priorities for 2019, visit www.finra.org and if you have any questions or concerns about FINRA’s 2019 exam priorities, written supervisory procedures, or risk assessments, call us at (619) 278-0020 or visit us on the web at www.corecls.com.

CCO Buzz: Thanks so much for joining us today, Adam. And as an aside, we’d like to note that we have pulled the following information from today’s episode directly from FINRA’s 2019 Priorities Letter. Again, the team at Core Compliance is happy to assist you in further understanding and applying the priorities to you firm’s compliance practices. Thanks!

Well that’s it for this week’s episode. If you’d like additional information, please check out our website at www.corecls.com. You can also follow us on Facebook, LinkedIn or Twitter @CoreCLS. Thank you and we hope you tune into next week’s episode of the CCO Buzz.

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