In its Risk Monitoring and Examination Priorities Letter (the "2020 Letter"), FINRA identified several areas of focus for 2020, including:
- Sales Practice and Supervision. FINRA will assess firms' compliance with Regulation Best Interest ("Reg. BI") and Form CRS. In addition, FINRA will focus on (i) communications to retail investors regarding private placements, (ii) use of different electronic communication channels (e.g., texting and social media), (iii) cash management and bank sweep programs, (iv) sales of IPO shares and (v) trading authorizations.
- Market Integrity. FINRA will monitor firms for compliance with current Order Audit Trail System ("OATS") requirements, and implementation of Consolidated Audit Trail ("CAT") reporting requirements. In addition, FINRA will address firms' compliance with (i) direct market access requirements under Exchange Act Rule 15c3-5, (ii) best execution requirements under FINRA Rule 5310, and (iii) the requirements of Rule 603 (the "Vendor Display Rule") and Rule 606 ("Disclosure of order routing information") of Regulation NMS.
- Financial Management. FINRA will focus on (i) clearance and custody of digital asset transactions, (ii) liquidity management, (iii) compliance with net capital requirements in connection with underwriting commitments and (iv) the steps firms are taking to transition away from LIBOR.
- Firm Operations. FINRA will focus on (i) cybersecurity, (ii) technology governance programs and (iii) supervisory controls relating to customer confirmation and AML requirements.
This is a regulatory chocolate box, with something for every broker-dealer. In addition to perennial topics that generally appear on FINRA's Annual Priorities Letters, the new areas of focus include compliance with requirements under recent rulemakings, including Reg. BI and Form CRS, and technology-related topics, including cybersecurity, digital asset transactions and high-frequency trading. The 2020 Letter contains "practical considerations and questions" that FINRA will consider in assessing firms' compliance with relevant requirements. Firms should thus review their compliance and supervisory procedures to confirm that these address the issues identified in the 2020 Letter. Firms should also assess the records that they should generate in order to demonstrate compliance with applicable requirements. Appendix 1 and the Endnotes to the 2020 Letter contain additional regulatory resources that firms may consult in order to address each topic more fully. Firms should also consult the SEC OCIE 2020 Examinations Priorities report, which includes topics on the SEC's examination agenda for broker-dealers. Finally, please note that the Cadwalader Cabinet contains a Regulatory Change Management Tracker, which enables firms to view rulemakings and compliance dates applicable to broker-dealers.
Several of the financial management areas of focus are as to issues where there is not actually a rule in place; e.g., liquidity management and transition from LIBOR. That does not make them any less significant. Firms may want to consider how they institute operational procedures to deal with regulatory expectations where there is not a specific rule that drives the firm's conduct.
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