I would imagine that the point of FINRA releasing its list of exam priorities each year is to help firms who are actually going to be examined, by providing a glimpse into FINRA’s playbook so they can address, proactively, the issues they know FINRA will focus on. To be forewarned is to be forearmed, right? It is a great theory. Unfortunately, in practice, it has turned out, perhaps, not to be quite as useful as imagined, as the list basically stays the same from year to year, with some modest adjustments. Such is the case with the 2018 Letter, released this week.
For instance, once again, we can see discussions on AML, OBAs, suitability, and best execution. These topics are covered seemingly every year, with nothing new really added to the mix. The idea that FINRA is focusing on them during its exams can hardly be deemed newsworthy, so the utility of the exam priorities letter is questionable. With that said, any firm stupid enough to ignore these annual warnings from FINRA gets what it deserves.
Even when there’s a supposed new topic, even that is somewhat illusory. For instance, FINRA mentions that it will be keeping a close eye on the sale of cryptocurrencies and initial coin offerings (as it should). But, those are just the new, cool investment products du jour. The fact is, FINRA has already spoken many times about its concerns regarding a firm’s obligations when it sells new products, particularly when those products are complex. Again, it should not be news to any well-run BD that before it oks the sale of a new product, it must first undertake an extensive reasonable basis suitability analysis to ensure its efficacy. That was true before, and remains true. Thus, while the particular products the Letter highlights are, in fact, new, the guidance provided is the same old, same old.
But enough of the obvious, let’s look at those items in the Letter that are worth our attention. I will boil it down to a few easy-to-absorb bullet points:
- FINRA does not like fraud. Of any variety. But, if you put a gun to FINRA’s head, it will admit that it particularly doesn’t like:
- Microcap fraud,
- Fraud perpetrated on seniors, and, most of all,
- Microcap fraud perpetrated on seniors.
- If you have a registered rep working for you with an extensive disciplinary history, or you are considering hiring such an individual, then it is clear that FINRA is expecting that you will have conducted some careful analysis of whether a heightened supervision plan is necessary. Indeed, I suspect that FINRA is approaching the point where, essentially, a rebuttable presumption exists that an HSP is necessary.
- If you haven’t already designated someone to serve as your “Cyber” guy, whether in-house or outsourced, you need to do it. Now. While no one can 100% prevent cyber related issues, it won’t become a regulatory problem if you’ve got a robust plan in place.
- FINRA will be focusing on disclosures to customers, principally in the context of risk disclosure (apparently, for instance, some firms are somehow inducing their customers to utilize margin without adequately disclosing the risks of using margin . . . which, frankly, I don’t really understand how that can happen given that Rule 2264 outlines – verbatim – the risk disclosures that must be made to margin customers).
- Even though global warming is a myth, 2017 proved that every BD needs to have a real business continuity plan in place, heaven forbid a catastrophic storm hits and power disappears for an extended period of time. In that same vein, FINRA wants to be sure that firms have undertaken liquidity planning, which can become of paramount importance in times of “stress,” including stress caused by catastrophic storms. Truly, FINRA could care less if a BD is forced to go out of business, but, it does care if, in the process of going out of business, regardless of the reason, customers are impacted in a negative way.
Finally, a nice feature to this year’s edition of the Letter is a list of new rules that have already been approved but which are only going into effect this year. There is a handy reminder of things that BDs will need to implement in order to demonstrate compliance with these new rules. While FINRA unofficially provides a little bit of a grace period to get new supervisory systems and procedures and new forms and documents in place, that is nothing that you can safely count on, so you should be prepared, once the examiners arrive at your door, to show that you’re aware of the rule changes and have implemented all necessary changes.