On January 2, the Financial Industry Regulatory Authority issued its annual letter to FINRA member firms outlining FINRA’s regulatory and examination priorities for 2014. The letter is meant to highlight areas of significance to FINRA’s regulatory programs.
In the letter, FINRA highlighted a number of business conduct priorities that are broadly consistent with themes from 2013. FINRA is continuing to focus on suitability for complex products, recidivist brokers who may bring illegal or unethical practices to a new firm, conflicts of interest management practices, cybersecurity of sensitive customer data, qualified plan rollover option disclosures, initial public offerings, general solicitation and advertising of private placements, due diligence of firm offerings, other issues relative to private placements, anti-money laundering programs, municipal advisory activity, regulation and oversight of crowdfunding portals, and policies regarding senior investors and investors approaching retirement. FINRA is also concerned about a number of fraud issues, particularly activities involving microcap and low-priced, over-the-counter securities, and procedural safeguards against insider trading.
FINRA’s letter focused on financial and operational priorities, including risk control documentation and testing, the accuracy of a firm’s financial statements and net capital records, auditor independence, and liquidity and funding risk. FINRA might ask larger firms to perform liquidity stress tests that would incorporate important factors FINRA believes aid understanding of the resiliency of the firm’s liquidity. The framework for the test would stress four basic areas of the firm’s business: (1) funding of proprietary positions, (2) repo book, (3) settlement payments and clearing deposits with customer banks, central counterparties and clearing organizations, and (4) funding loss of customer balances or increases in obligations to lend to customers. FINRA will explore whether a firm has incorporated these items into its framework and whether any funding gaps exist in the firm’s contingent funding plan.
Finally, FINRA addressed regulatory priorities regarding trading and trade reporting. Among other issues, FINRA is concerned about algorithmic trading malfunctions and whether firms’ testing and controls related to algorithmic trading is adequate in light of the Securities and Exchange Commission’s Market Access Rule and other supervisory obligations. High-frequency trading abuses such as “momentum ignition strategies” will be of particular concern to FINRA. FINRA also wants to focus on deficiencies in audit trails, especially Large Options Positions Reporting, and firms’ practices regarding best execution obligations with respect to equity, fixed income and options securities.
FINRA’s letter is available here.
