FINRA Identifies 2014 Examination Priorities

by Goodwin

In a letter to all FINRA member firms (the “FINRA Priorities Letter”), FINRA set forth its regulatory and examination priorities for 2014, highlighting significant risks and issues that could adversely affect investors and market integrity in the coming year. 

FINRA’s 2014 examination priorities are as follows:

Business Conduct Priorities

Suitability.  FINRA remains concerned about the suitability of recommendations to retail investors for complex products whose risk-return profiles, including their sensitivity to interest rate changes, underlying product or index volatility, fee structures or complexity may be challenging for investors to understand.  In this regard, the FINRA Priorities Letter states that, among other things, FINRA will be focused on the sale and suitability of:

  • Complex structured products
  • Non-traded real estate investment trusts
  • Frontier funds (often investing in politically unstable regions of the world)
  • Interest Rate Sensitive Securities, including mortgage-backed securities, long duration bonds and bond funds, emerging market debt, municipal securities, and baby bonds.

Recidivist Brokers.  FINRA noted that a small number of brokers have a pattern of complaints or disclosures for sales practice abuses that could harm investors as well as the reputation of the securities industry and financial markets.  FINRA will be expanding the High Risk Broker initiative, which was commenced in 2013 to identify such individuals and expedite investigations, and will create an enforcement team to prosecute such cases.

Conflicts of Interest.  FINRA stated that its examiners will explore topics addressed in its October 2013 report on conflicts of interest including firms’ approaches to identifying and managing conflicts as well as the participation of senior management in this process.  FINRA will evaluate firms’ conflicts management practices to help further inform its view on industry practices by focusing primarily on actions taken by firms and the impact on their clients, rather than focusing strictly on regulatory requirements.

Cybersecurity.  FINRA stated that its primary focus will be the integrity of firms’ policies, procedures and controls to protect sensitive customer data, and that its evaluation of cybersecurity matters will take the form of examinations and targeted investigations. 

Qualified Plan Rollovers.  FINRA noted that it shares concerns, articulated by the U.S. Government Accountability Office (“GAO”) in its 2013 Report, that the financial industry generally encourages employees to roll over their assets into IRAs without fully explaining the options that are available to these investors or making a valid determination that a rollover into an IRA is in the investor’s best interest.  Reviewing firm rollover practices will be an examination priority, and staff will examine firms’ marketing materials and supervision in this area.  FINRA will also evaluate securities recommendations made in rollover scenarios to determine whether they comply with suitability standards in FINRA Rule 2111.

Initial Public Offering Market.  FINRA noted the increase in the initial public offering (“IPO”) market during recent periods, and stated that for firms engaged in the public underwriting business, FINRA will review the firm’s due diligence activities, monitor the completeness and accuracy of firms’ filings regarding public underwritings with FINRA’s Corporate Finance Department, and review compliance with rules concerning the sales and allocations of IPO securities, including whether firms are incenting associated persons to sell cold offerings with client allocations of hot offerings.

Private Placement of Securities.  The FINRA Priorities Letter identifies private placements of securities as a priority, including a focus on:

  • General Solicitation and Advertising of Private Placements.  FINRA reiterated its longstanding concern about abuses in the sale and marketing of private placement of securities, noting that recent amendments to Rule 506 of Regulation D permit, subject to certain limitations, general solicitation and advertising when offering some private placements.
  • Due Diligence and Suitability of Private Placements.  FINRA stated that it will examine firm private placement activity to determine whether firms are taking reasonable steps to validate that investors meet accredited investor standards prescribed by Rule 506.
  • Offerings of Securities through Private Placements.  FINRA will verify that firms are making required filings under FINRA Rules 5122 and 5123.

Anti-Money Laundering.  FINRA stated that in 2014 it will focus on anti-money laundering issues associated with the institutional business, noting emerging trends related to the utilization of executing broker-dealers by certain DVP/RVP (Delivery versus Payment/Receipt versus Payment) customers to liquidate large volumes of low-priced securities.  FINRA also noted the misconception among some executing brokers that Customer Identification Program Requirements do not apply to DVP/RVP customers.  In this regard, FINRA stated that it is important that all firms, regardless of business model, develop a risk-based AML program designed to address the risk of money laundering specific to their firm.

Municipal Advisors.  FINRA noted recent rules regarding municipal advisors promulgated by the SEC and that FINRA has been designated as the examining authority for municipal advisors that are FINRA members. 

Crowdfunding Portals.  FINRA noted that under the Jumpstart our Business Startups Act (the “JOBS Act”) retail investors are permitted to purchase unregistered securities offered through crowdfunding websites, and that FINRA has proposed rules with the objective of ensuring that the capital-raising objectives of the JOBS Act are advanced in a manner consistent with investor protection.  FINRA stated that as funding portals become FINRA members, FINRA will implement a regulatory program designed to protect investors while recognizing the distinctions between funding portals and broker-dealers.

Senior Investors.  FINRA stated that in 2014 its examiners will continue to focus on how firms engage with investors who are approaching retirement and who control a substantial portion of investable assets.

Fraud Detection Priorities

Microcap Fraud.  FINRA stated that microcap and low-priced over-the-counter (“OTC”) securities continue to be an area of significant concern. 

Insider Trading.  FINRA stated that insider trading continues to be a top regulatory priority and reiterated its points made in its 2013 examination priorities letter (the “2013 Priorities Letter”).  Specifically, FINRA stated that firms must continue to be vigilant in safeguarding material, non-public information, and should periodically assess information barriers and risk controls to ensure they are adequate.

Financial and Operational Priorities

Funding and Liquidity Risk.  FINRA stated that it will continue to be focused on funding and liquidity risk in 2014, noting that in 2014 it will ask many larger firms to perform a liquidity stress test that incorporates factors FINRA believes are important to understanding the resiliency of the firm’s liquidity position.  Specifically, FINRA will require stress-testing in the following four basic areas of the firm’s business: (a) stressed funding of proprietary positions (loss of counterparties, loss of funding for less liquid assets, widening of haircuts); (b) stressing of repo book (loss of counterparties, loss of internally generated liquidity, widening of haircuts); (c) stressing settlement payments and clearing deposits with clearing banks, central counterparties (CCPs) and clearing organizations; and (d) funding loss of customer balances or increases in obligations to lend to customers.

Risk Control Documentation and Assessment.  FINRA noted recent amendments to Rule 17a-3 of the Securities Exchange Act of 1934 which will require firms that hold more than $1 million in aggregate customer credits or $20 million in capital, including subordinated debt, to document their credit, market and liquidity risk management controls, and stated that it will examine these risk controls in 2014.

Accuracy of Firm’s Financial Statements and Net Capital.  FINRA stated that firms must be in a position to prepare accurate financial statements throughout the year, noting that areas of continued concern include: (a) failure to apply Open Contractual Commitment Charges, haircuts, undue concentration or blockage charges; (b) failure to comply with the Net Capital Rule at all times and, as a related item, failure to cease operations when a firm is under required capital until the net capital deficiency is cured; (c) failure to prepare books and records on an accrual basis, or only making proper accruals at the end of a broker-dealer’s fiscal year; and (d) netting transactions in the absence of authoritative accounting guidance which permits such netting.

Auditor Independence.  FINRA noted recent findings by the Public Company Accounting Oversight Board regarding the lack of independence by auditors of small broker-dealers.

Market Regulation Priorities 

Algorithmic Trading and Trading Systems.  FINRA noted that there have been a number of algorithmic trading malfunctions in recent years that have caused substantial market disruptions and raise concerns about firms’ ability to develop, implement and effectively supervise these systems.  In this regard, FINRA reiterated a number of comments from the 2013 Priorities Letter, noting that it will continue to assess whether firms’ testing and controls related to high frequency trading (“HFT”) and other algorithmic strategies and trading systems are adequate in light of the Market Access Rule and firms’ other supervisory obligations.

High Frequency and Other Algorithmic Trading Abuses.  FINRA noted the growth of HFT strategies in recent years and noted that some HFT strategies may be used for manipulative purposes.  In this regard, FINRA stated that firms’ need to be vigilant and outlined certain specific areas of concern that will be a focus of FINRA’s 2014 examinations.

Audit Trail Integrity.  FINRA notes that it has perceived significant, prolonged and wide-scale deficiencies in Large Options Positions Reporting (“LOPR”) and in properly marking the capacity of firm option orders.  FINRA stated that firms should assess their supervisory controls in these areas and that in 2014 FINRA anticipates focusing on in-concert reporting deficiencies, improper position deletions, non-reporting of positions, and the process that firms use to internally determine whether an OTC position qualifies as a reportable options position.

Best Execution of Equities, Options and Fixed Income Securities.  FINRA noted that has introduced new surveillance patterns to monitor best execution in equities and fixed income securities, and new procedures to monitor for best execution with respect to options transactions.  Among other things, FINRA stated that it will focus more closely on firms’ practices to ensure compliance with their best execution obligations with respect to limit orders in equity securities, and will review situations where a firm potentially ignores a favorable price on one options market and executes a trade on another to the detriment of the Customer.


FINRA encouraged firms to use the FINRA Priorities Letter, along with its own analysis, to enhance their compliance programs, stating that FINRA will be examining for strong controls and robust compliance efforts in the areas identified in the FINRA Priorities Letter.

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this informational piece (including any attachments) is not intended or written to be used, and may not be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Goodwin | Attorney Advertising

Written by:


Goodwin on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.