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The Friday List: 2020 Examination Priorities

Today, we offer our “Friday List,” an occasional feature summarizing a topic significant to investment management professionals interested in regulatory issues.  Our Friday Lists are an expanded “Our Take” on a particular subject, offering our unique (and sometimes controversial) perspective on an industry topic.

Both FINRA and the SEC OCIE staff recently released their 2020 examination priorities.  Today’s list summarizes their 10 most significant concerns for investment managers and broker-dealers.   New areas this year include Regulation Best Interest, digital assets and cash sweep programs. Some longtime favorites include anti-money laundering, best execution, and retail sales practices.  Compli-pros should use these letters to prepare their compliance programs and exam readiness.

10 Most Significant 2020 Examination Priorities

  1. Compliance programs. OCIE’s overriding concern is assessing whether compliance is actively engaged in firm operations and whether the CCO is knowledgeable and empowered.  FINRA wants firms to evaluate the “state of their compliance, supervisory and risk management programs.”
  2. Regulation Best Interest. Both OCIE and FINRA warn firms to implement new procedures and processes to comply with Regulation Best Interest, including Form CRS, and related interpretations.
  3. Retail Sales Practices. OCIE wants firms to re-consider disclosure, sales practices and conflicts of interest when advising retail clients.  FINRA adds supervision and focuses on certain products such as private placements and variable annuities.
  4. Revenue Sharing. The regulators have serious reservations about advisers who have a financial interest in the products they recommend.
  5. Information Security. Firms need to assess systems, technology governance, and testing to ensure the protection of clients’ personal information.
  6. Trading Practices. FINRA will target market manipulation practices, mark-ups/mark-downs, short sales, short tenders, and TRACE reporting.
  7. Digital Assets. OCIE worries that firms may not understand the differences between digital assets and more traditional products.  The examination staff will review suitability, trading, custody, valuation, and supervision.
  8. Anti-Money Laundering. Both regulators expressed concerns about how broker-dealers comply with their anti-money laundering obligations.
  9. Cash Sweep. FINRA wants firms to consider how they communicate features and options and how the programs operate.
  10. Best Execution. Always a perennial favorite, FINRA will focus on routing decisions, odd-lots, and options.

FINRA Plans Review of Regulation BI Compliance Among Other Examination Priorities

 FINRA plans to examine firm compliance with new Regulation Best Interest, Form CRS and related SEC guidance and interpretations during the upcoming year, according to its 2020 Risk Monitoring and Examination Priorities Letter.  FINRA will review whether firms have implemented procedures and training, whether their reps observe the best interest standard of care, how the firm guards against excessive trading, and the extent to which firms identify and address conflicts of interest.  Other significant priorities include sales practices and supervision (especially complex products, variable annuities, private placements, mark-ups/downs, and senior investors), trading authorization, best execution, TRACE reporting, and cybersecurity.

It is notable that FINRA intends to prioritize Regulation BI in the first year.  Usually, the regulators give some time for firms to put operations in place before conducting regulatory sweeps for compliance with new laws and regulations.      

The Friday List: 2018 Examination Priorities

Today, we offer our “Friday List,” an occasional feature summarizing a topic significant to investment management professionals interested in regulatory issues.  Our Friday Lists are an expanded “Our Take” on a particular subject, offering our unique (and sometimes controversial) perspective on an industry topic.

Both FINRA and the SEC OCIE staff recently released their 2018 examination priorities.  Today’s list synthesizes their missives into the 10 most significant regulatory priorities for investment management firms.   Several of these priorities are new this year including cryptocurrency, wrap fee programs, and thinly-traded securities.  Others such as AML, suitability and best execution are regulatory greatest hits that appear nearly every year.   Compli-pros should use these letters to prepare their compliance programs and exam readiness.

 

10 Most Significant 2018 Examination Priorities

 

  1. Disclosure of fees and expenses: Both OCIE and FINRA champion full transparency of fees and expenses so that clients can make informed decisions and understand possible conflicts of interest.
  2. Cryptocurrency:  Expect a lot of attention paid to initial coin and cryptocurrency offerings including recommendations, disclosure, volatility, and security.
  3. Cybersecurity:  The regulators want to ensure that firms implement adequate cyber policies and procedures to protect client information and data systems.
  4. AML and KYC:  This is an area that both regulators have identified for many years, although the focus has moved to customer due diligence and firms’ gatekeeper role to keep securities markets safe.
  5. Protecting senior investors: Both regulators want to protect senior investors.  The SEC focuses on recommendations to retirement accounts.  FINRA will review compliance with rules to prevent exploitation.
  6. Wrap fee programs: The SEC continues its persecution and prosecution of wrap fee programs, including due diligence, best execution, and conflicts.
  7. Thinly-traded ETFs and microcaps:  The regulators have raised the red flag about recommending thinly-traded securities that are subject to market manipulation and pay exorbitant commissions.
  8. High risk brokers:  FINRA wants firms to enhance hiring and supervision practices to keep bad actors out of the industry.
  9. Suitability: Firms must implement procedures to vet products and train reps.
  10. Best execution:  FINRA is particularly concerned about order-routing practices and resulting conflicts of interest.

The Friday List: 2017 Examination Priorities

the list

Today, we offer our “Friday List,” an occasional feature summarizing a topic significant to investment management professionals interested in regulatory issues.  Our Friday Lists are an expanded “Our Take” on a particular subject, offering our unique (and sometimes controversial) perspective on an industry topic.

Within the last 2 weeks, the SEC OCIE staff and FINRA published their 2017 examination priorities letters (see SEC letter here and FINRA letter here).  If past is prelude, the regulators will fulfill their promises to examine the highlighted areas.  Also, the regulators have advised compliance staff to spruce up procedures and testing in these areas.  We did a breakdown of the two letters and offer our view of the most significant priorities.

 

10 Most Significant 2017 Examination Priorities

 

  1. Suitability:  The SEC expressed significant concern about mutual fund share classes and wrap programs.  FINRA will look at rep training as well as over-concentration of high-risk products.
  2. Cybersecurity: Each of the SEC and FINRA specifically highlighted cybersecurity.  They will review information security, data storage formats, password controls, physical security, and service provider oversight.
  3. Bad Brokers: Both the SEC and FINRA will target firms that retain and/or hire recidivist brokers.  The regulators will review supervision as well as hiring and training practices.
  4. Senior Investors: Both regulators will focus on sales practices to, and products for, senior investors.   The regulators are concerned with suitability especially related to high-yield products, target-date funds, and variable insurance products.
  5. Public Plans: The OCIE staff will scrutinize how advisers to public pension plans fulfill their fiduciary duties.  The staff also plans to examine pay-to-play practices.
  6. Branch Offices: Both regulators will examine how firms supervise branch locations.  These exams will include reviews of marketing, client communications, and outside business activities.
  7. Anti-Money Laundering:  Both the SEC and FINRA expressed continued concern about AML compliance.  They will test suspicious activity reporting, independent testing, automated trading, money movement, and foreign currency transactions.
  8. Robos: The SEC will focus on compliance programs, suitability, data protection, and algorithm oversight.
  9. ETFs: The SEC wants to ensure compliance with exemptive relief conditions.  The staff also promised reviews of the creation/redemption processes and sales practices.
  10. Private Funds: The SEC staff expressed concern about the private fund industry including conflicts of interest, disclosure and fees.