Financial Industry Regulatory Authority: What Are They Looking For In 2014

What Will Financial Industry Regulatory Authority 2014 Examiners Be Looking for in 2014?

The Financial Industry Regulatory Authority (FINRA) recently released a letter outlining its regulatory and examination priorities for 2014. It should be considered “must read” material for all broker dealers.

Susan Axelrod, Executive Vice President, Regulatory Operations, said, “The purpose of this letter is to provide insight to the industry on specific areas of concern for our regulatory programs in the coming year. We encourage firms to use this guidance along with their own analysis to enhance their programs as we will be examining for strong controls and robust compliance efforts in these areas.”

The Financial Industry Regulatory Authority letter addresses a wide range of issues, including business conduct, fraud, financial and operational concerns, and market regulation. Below are some of the highlights:

Recidivist brokers:

New to Financial Industry Regulatory Authority’s exam priorities are so-called recidivist brokers, those who have a pattern of complaints or disclosures for sales practice abuses. The enhanced scrutiny means that firms should thoroughly investigate all new hires and have procedures in place for heightened supervision of brokers who may have questionable backgrounds. Financial Industry Regulatory Authority plans to use both its High Risk Broker initiative and its Broker Migration Model to focus its enforcement efforts.

Cybersecurity:

In the wake of several high-profile data breaches impacting the financial industry, Financial Industry Regulatory Authority plans to assess the integrity of firms’ policies, procedures, and controls to protect sensitive customer data. Accordingly, firms should evaluate and test their current data protection procedures to detect and address any potential weaknesses.

IPOs:

As the market for initial public offerings (IPOs) continues to heat up, examiners will be keeping a close eye on firms entering the underwriting business or significantly expanding their activities in this area. Financial Industry Regulatory Authority specifically cites compliance with Rule 5131 which, among other things, prohibits quid pro quo allocations and “spinning,” and addresses the conduct of firms and associated persons in the areas of book-building, new issue pricing, penalty bids, trading and waivers of lock-up agreements, as primary concern.

Liquidity risks:

Starting this year, Financial Industry Regulatory Authority will take enhanced steps to assess the funding and liquidity risks of regulated firms. Larger firms will be required to conduct liquidity stress tests, which will focus on the impact of a loss of funding for their proprietary positions, their repo book, settlement and depository payments, and funding of customer balances.

Algorithmic trading:

Citing algorithmic trading malfunctions that caused substantial market disruptions, Financial Industry Regulatory Authority plans to monitor whether firms’ testing and controls related to high-frequency trading (HFT) and other algorithmic trading strategies and trading systems are adequate in light of the Market Access Rule and firms’ other supervisory obligations. Oversight may be conducted through both examinations and targeted investigations, according to the letter.

Among other top concerns, the letter also addresses perennial favorites like suitability, conflicts of interest, complex products, and anti-money laundering efforts. Finally, Financial Industry Regulatory Authority has indicated that it will update its view on risk throughout the year, and registered firms should do the same.

If you have any questions about Financial Industry Regulatory Authority’s 2014 regulatory and examination priorities, please feel free to fill out the comment section below.