FINRA 2018 Regulatory and Examination Priorities Letter

The 2018 Regulatory and Examination Priorities Letter is an affirmation  that the coming year will bring both continuity and change in FINRA’s regulatory programs. The continuity comes, first in the commitment of FINRA to their stated mission: protecting investors and promoting market integrity in a manner that facilitates vibrant capital markets.

The Priorities Letter speaks to FINRAs commitment to continue to address fraud by stopping bad actors by implementing transparent sales practices to identifying and halting abusive market activities.  This commitment includes a number of the specific priorities from the prior year that remain priorities this year, such as a continuing focus on identifying high-risk firms and individual brokers, and mitigating the potential risks that they can pose to investors in terms of both rulemaking initiatives and examinations, business continuity planning, protection of investor assets, cybersecurity threats, along with anti-money laundering issues and suitability with respect to complex investment products available to investors.

With that said, new focuses have emerged as a result of market activities.  To that end, FINRA noted that it will closely monitor developments and its oversight of digital assets (such as cryptocurrencies) and initial coin offerings (ICOs), as they have received significant media, public and regulatory attention in the past year. This area includes the role firms and registered representatives may play in effecting transactions in such assets and ICOs. Where such assets are securities or where an ICO involves the offer and sale of securities, FINRA may review the supervisory, compliance and operational infrastructure that firms have put in place to ensure compliance with relevant federal securities laws and regulations and FINRA rules.

Additionally, FINRA acknowledged that it will launch several new report cards to assist firms with their compliance efforts, and they will review whether and how firms make use of the Auto Execution Manipulation Report Card, the Alternative Trading System Cross Manipulation Report Card and Fixed Income Mark-up Report Card.

Finally, FINRA focused firms’ attention to some significant new rules that will become applicable in 2018.  These rules will result in FINRA addressing these issues on the steps they are taking to implement the obligations under these rules, where applicable.  The rules impacting the majority of member firms include:

  • Financial Exploitation of Specified Adults: FINRA Rule 2165 became effective February 5, 2018 and permits members to place temporary holds on disbursements of funds or securities from the accounts of specified customers where there is a reasonable belief of financial exploitation of these customers.
  • Amendments to FINRA Rule 4512 (Customer Account Information): An amendment to FINRA Rule 4512 requires members to make reasonable efforts to obtain the name of and contact information for a trusted contact person for a non-institutional customer’s account. The amendment became effective February 5, 2018.
  • The Financial Crimes Enforcement Network’s (FinCEN) Customer Due Diligence Rule (CDD Rule): Firms have until May 11, 2018, to comply with FinCEN’s CDD Rule. FinCEN issued the CDD Rule to clarify and strengthen customer due diligence for covered financial institutions, including broker-dealers. In the CDD Rule, FinCEN identifies four components of customer due diligence: (1) customer identification and verification; (2) beneficial ownership identification and verification; (3) understanding the nature and purpose of customer relationships; and (4) ongoing monitoring for reporting suspicious transactions and, on a risk basis, maintaining and updating customer information.
  • Amendments to FINRA Rule 2232 (Customer Confirmations): The amended FINRA Rule 2232 requires a member to disclose the amount of mark-up or mark-down it applies to trades with retail customers in corporate or agency debt securities if the member also executes offsetting principal trades in the same security on the same trading day. The amended rule also requires members to disclose two additional items on all retail customer confirmations for corporate and agency debt security trades: (1) a reference, and a hyperlink if the confirmation is electronic, to a web page hosted by FINRA that contains publicly available trading data for the specific security that was traded and (2) the execution time of the transaction, expressed to the second. These amendments are scheduled to become effective on May 14, 2018.
  • Margin Requirements for Covered Agency Transactions (Amendments to FINRA Rule 4210): FINRA’s new margin requirements for Covered Agency Transactions are scheduled to become effective on June 25, 2018. Covered Agency Transactions include (1) To Be Announced (TBA) transactions, inclusive of adjustable rate mortgage (ARM) transactions; (2) Specified Pool Transactions; and (3) transactions in Collateralized Mortgage Obligations (CMOs), issued in conformity with a program of an agency or Government-Sponsored Enterprise (GSE), with forward settlement dates. Members are reminded that the risk limit determination requirements under the amendments to Rule 4210 became effective on December 15, 2016.

As noted above, the Priorities Letter outlines FINRA’s areas of focus as of the beginning of 2018, and FINRA urges firms to use it as a point of reference for their compliance, supervisory and risk management programs and to prepare for FINRA examinations.  However, while FINRA may adjust its priorities as circumstances change, Robert W. Cook, President and CEO of FINRA noted that change will come in how to accomplish FINRA’s mission. He also stated that “a number of significant enhancements have been made to improve operations, and more changes are on the horizon for the coming year”.  For the full text of his cover letter to the Priorities Letter, click “here”.