Feb 22, 2019

Financial Industry Regulatory Authority (FINRA) 2019 examination priorities

The Financial Industry National Regulatory Authority’s (FINRA) annual examination letter is published and the highlights are as follows:

1) Financial Crimes Enforcement Network’s (FinCEN) Customer Due Diligence Rule

The Customer Due Diligence Requirements for Financial Institutions (CDD Rule) became effective on May 11, 2018. The CDD Rule requires that broker-dealers identify owners of entity clients understand the purpose of an account, conduct ongoing monitoring based on need, and report suspicious activities.

2) Markup and mark downs on fixed income transactions

FINRA will check whether broker-dealers are complying with FINRA Rule 2232 (customer confirmation) and Municipal Securities Rulemaking Board (MSRB) Rule G-15, which became effective on May 14, 2018. The later rule provides what must be included in the confirmation statements for municipal bond trades.

3) Supervision of digital assets

These assets include cryptocurrencies like Bitcoin, which may be securities or involve the offer or sale of securities. For example, if a fund to trade Bitcoin is created with a manager, an investment in the fund likely involves an “investment contract,” which is a security. FINRA will examine this topic in a two-pronged manner. The first is through exams and the second employs the membership application process. FINRA will be seeking to assess whether these activities are in compliance with securities laws and regulations. Furthermore, the regulator will examine compliance, operational controls and supervisory responsibilities of broker-dealers in connection with applicable rules.

4) Senior investors

Protection of the elderly—those who are retired and those who are approaching retirement—continue to be a crucial priority for FINRA. This manifests itself by FINRA examining financial exploitations, fraud and sales practice abuses. A special concern is where registered representatives act as fiduciaries (i.e., a trustee) due to the possibility for exploitation.

5) Suitability and concentration

FINRA is especially focusing on quantitative suitability like churning, recommendations to purchase share classes or assets that are incongruent with the customer’s stated time horizon and hold periods that do does not match the intended use of the product. Lastly, FINRA will closely examine overconcentration in securities that are illiquid such as private
placements or alternative investments that are infrequently or never publicly traded.

This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.

Client alert authored by Andrew S. May, Principal