FINRA and SEC Exam Priorities

Recently, both FINRA and the SEC have issued their 2016 Exam Priorities. Both letters include several overlapping topics and reflect regulators continued focus on retail investor protection. Below please find brief summaries of each of the letters.

FINRA Exam Priorities

Firm Culture
In 2016, FINRA will formalize its assessment of a firm culture and how firms conduct their business and manage their conflicts of interest. FINRA will not attempt to dictate culture to firms, but instead will look to understand how a firm’s culture impacts its compliance and risk management practices. FINRA has defined culture as a set of norms, both implicit and explicit, that influence how leadership and employees and FINRA member firms implement decisions in the course of a firm’s business.

Management of Conflicts of Interest
In 2016, FINRA will complete its targeted exam of conflicts of interest management practices at retail brokerage firms. This review, launched in 2015, seeks to understand how firms mitigate conflicts of interest concerning issues such as registered representative compensation, proprietary products, and third-party payments.

FINRA will continue to review firm practices concerning: governance, risk assessment, technical controls, incident response, vendor management, data loss prevention, and staff training. In particular, FINRA will continue to examine for compliance with Regulation S-P and Rule 17a-4(f), which governs storage standards for electronic records.

Suitability and Concentration
FINRA’s sales practice exams will focus on suitability of complex products. Such products may include: high-yield and speculative bonds, unlisted equities, alternative mutual funds, emerging market funds, structured products, non-traditional exchange-traded products, and securities-backed loans. Additionally, FINRA will assess new product review committees and due-diligence and training practices. Finally, FINRA will continue to examine for excess concentration, particularly for products deemed to be risky.

Seniors and Vulnerable Investors
FINRA will make the treatment of senior and vulnerable investors a priority in 2016. Specifically, FINRA will focus on suitability, concentration limit concerns, and higher cost products recommended to senior and vulnerable adults that may be unsuitable. FINRA encourages firms to monitor senior and vulnerable investor accounts to look for red flags such as possible abuse or overly aggressive investments.

Sales Charge Discounts and Waivers
FINRA will continue to examine for failures to provide appropriate volume discounts or sales charge waivers for products such as mutual funds, UITs, non-traded REITs, and BDCs. In 2015, FINRA levied significant fines concerning these issues for a variety of packaged products.

Non-Traded REITs and DPPs
FINRA has noticed that in anticipation of amendments to NASD Rule 2340 and FINRA Rule 2310, product sponsors of non-traded REITs and DPPs are repositioning their existing product lines. FINRA believes that these new share classes will benefit investors by providing greater transparency on fees and expenses and more timely valuations. FINRA reminds firms that unlisted BDCs must also comply with its new rules and that FINRA will subject all BDCs to rigorous reviews.

Outside Business Activities
In 2016, FINRA will evaluate firms’ procedures to review OBAs under FINRA Rule 3270. One of FINRA’s most consistent exam findings is that firms have not adequately assessed their advisors written notification for OBAs. FINRA will also focus as to whether an OBA may interfere or compromise an advisor’s responsibilities to the firm or firm’s customers or can be viewed by customers as a part of a firm’s business. FINRA will focus on whether customers are harmed due to failures to follow FINRA Rule 3270.

Other Issues
In addition FINRA will continue to examine firms’ supervisory procedures in regards to:

  • Technology Management
  • Data Quality and Governance
  • AML and Suspicious Activity Monitoring
  • Outsourcing

SEC Exam Priorities

Retirement Savings
In 2015, the SEC launched their ReTIRE initiative, concerning services offered by broker-dealers and investment advisers to retirement savers. The SEC will continue these examinations focusing on reasonable bases for recommendations, conflicts of interest, supervision and compliance controls, and marketing and disclosure practices.

Fee Selection and Reverse Churning
The SEC will continue to examine the best interest of recommendations on account types for retail investors, at both the inception of the arrangement and thereafter. These examinations will include an assessment of fees charged, services provided, and disclosures made about such arrangements.

Variable Annuities
The SEC will assess the suitability of variable annuity sales as well as the supervision of those sales and the adequacy of disclosures.

In 2016, the SEC will continue its second examination of broker-dealer and investment adviser cybersecurity practices. The examination includes testing and assessments of firms’ implementation of procedures and controls.

Public Pension Advisers
The SEC will examine advisers to municipal and other government retirement plans focusing on pay-to-play as well as other areas such as identification of undisclosed gifts and entertainment.

Recidivist Representatives and their Employers
Using analytic capabilities the SEC will identify representatives with a track record of misconduct and examine the firms that employ them. These exams will include assessments of investment advisers that employ individuals that have been disciplined or barred from a broker-dealer.

The SEC will continue to assess AML practices, focusing on firms that have not the number of suspicious activity reports that would consistent with their business model. Additionally, the SEC will focus on broker-dealers’ independent testing of its AML program and the extent to which firms consider and adapt their programs to emerging risks.


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