FINRA 2023 priorities hone in on supervision and risk management

26 February 2023 | Americas | Articles

The overall theme of FINRA’s exam priorities for 2023 will be supervision and risk management (or, lack thereof) of member firms according to its annual report. Released in December, the report, hones in on FINRA’s findings and observations from recent oversight activities, highlighting regulatory obligations and considerations firms should be addressing in their compliance programs.

The document introduced four important topics that advisers and broker dealers should consider:

1. Manipulative trading – This topic stems from FINRA findings around inadequate written supervisory procedures, non-specific surveillance thresholds and surveillance deficiencies.
2. Fair pricing on fixed income assets – FINRA findings again show issues with supervision in addition to incorrect determination of prevailing market price, outdated mark-up/mark-down grids and failure to consider the impact of mark-up on YTM (yield to maturity).
3. Fractional shares – Issues with reporting and inadequate supervisory systems and procedures.
4. Regulation SHO, a rule implemented by the SEC in 2005 to address naked short selling – 2022 FINRA findings show issues with non-bona fide market making and impermissible reuse of locates (a situation in which a broker-dealer loans out shares for short selling based on a previous locate request, while loaning out the same shares to another trader for short selling without obtaining a new locate request).

The report also introduced a financial crimes section covering cybersecurity, anti-money laundering, and fraud. Other key topics include a focus on Reg S-ID which requires firms to have written policies to detect, prevent and mitigate identity theft. FINRA also highlighted the potential danger from pump and dump schemes and scams involving social media.

With regards to complex products, FINRA will continue to review communications and disclosures to customers, and account activity to ensure that product recommendations are in the best interest of the retail clients. This is in line with its focus on Regulation Best Interest (Reg BI) where FINRA had observations on the ability of firms to identify and address conflicts of interest, enforcing adequate supervisory procedures and accurate reporting on Form CRS.

Finally, FINRA will concentrate on the risks associated with using mobile apps, observing the need for adequate disclosures and explanations surrounding higher-risk products or services (for example certain options and margin lending activities).

The report also covers more traditional areas including outside business activities. FINRA is reminding firms that outside business activities must be monitored and documented to prevent conflicts of interest. There are also discussions around payment for order flow, best execution evaluations and disclosures on routing information.

The priorities report demonstrates that FINRA is working diligently to address concerns with regulatory compliance of firms and disclosure of risks to retail consumers. The regulator is  intending to vigorously examine member firms on these areas.

How we can help

Our specialist team can help your compliance team navigate regulatory challenges by designing and implementing regulatory change programs that fit your specific needs. We can also support your ongoing compliance and work with you to develop risk assessments and monitoring programs to make sure your framework is robust.