On January 9, 2020, FINRA released its annual risk monitoring and examination priorities letter (the "2020 Letter").1 The 2020 Letter describes the areas of focus for FINRA's risk monitoring, surveillance and examination programs in 2020. The 2020 Letter is organized into four main areas, each with multiple subcategories:
- Sales Practice and Supervision;
- Market Integrity;
- Financial Management; and
- Firm Operations.
The 2020 Letter is wide-ranging, but this article discusses matters of interest to the structured products community.
Compliance with sales practice obligations and firms' supervision of these practices will be a continued area of focus in 2020, particularly with respect to complex products, variable annuities, private placements, fixed income mark-up/mark-down disclosures, representatives acting in certain positions of authority and senior investors.
Compliance with Regulation Best Interest and the use of Form CRS will also draw FINRA's attention. Prior to the Regulation Best Interest and Form CRS compliance date of June 30, 2020, FINRA will review firms' preparedness for Regulation Best Interest. After that date, FINRA will review firms' compliance with Regulation Best Interest, Form CRS and the related SEC guidance and interpretations.
FINRA listed ten factors which, among others, it would take into consideration when reviewing for Regulation Best Interest compliance after June 30, 2020:
- Does your firm have procedures and training in place to assess recommendations using a best interest standard?
- Do your firm and your associated persons apply a best interest standard to recommendations of types of accounts?
- If your firm and your associated persons agree to provide account monitoring, do you apply the best interest standard to both explicit and implicit hold recommendations?
- Do your firm and your associated persons consider the express new elements of care, skill and costs when making recommendations to retail customers?
- Do your firm and your associated persons consider reasonably available alternatives to the recommendation?
- Do your firm and your registered representatives guard against excessive trading, irrespective of whether the broker-dealer or associated person "controls" the account?
- Does your firm have policies and procedures to provide the disclosures required by Reg BI?
- Does your firm have policies and procedures to identify and address conflicts of interest?
- Does your firm have policies and procedures in place regarding the filing, updating and delivery of Form CRS?
FINRA will also review compliance with FINRA Rule 2210 (Communications with the Public), the supervisory and recordkeeping requirements in FINRA Rules 3110 and 4510 and the related rules under the Securities Exchange Act of 1934 (the "Exchange Act"), Rules 17a-3 and 17a-4 (Books and Records Requirements).
In 2020, FINRA will review how firms review, approve, supervise and distribute retail communications regarding private placement securities via online distribution platforms, as well as traditional channels. FINRA will also look at firms', registered representatives' and customers' use of digital communications (texting, messaging, social media or collaboration applications) and any challenges to firms' requirements relating to the review and retention of these digital communications.
Under the "Trading Authorization" category, FINRA will review whether firms have reasonably designed supervisory systems to detect and address registered representatives exercising discretion without written authorization from the client, as required under FINRA Rule 3260 (Discretionary Accounts).
Outside of FINRA's examination program, FINRA will engage with firms to understand how the broker-dealer industry is preparing for the LIBOR phase-out by year end 2021, any firms' exposure to LIBOR-linked financial products, steps that firms are taking to plan for the transition from LIBOR to alternative rates and the effect of the LIBOR phase-out on customers.
Originally published in REVERSEinquiries: Volume 3, Issue
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1. The 2020 FINRA Risk Monitoring and Examination Priorities Letter is available at: http://bit.ly/37N2WYA.
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