FINRA’s examination report: how does it apply to private placements?

FINRA’s examination report: how does it apply to private placements

FINRA’s latest report provides a comprehensive roadmap for member firms, both to prepare for examinations and to review procedures related to business practices, compliance and operations.

FINRA – the Financial Industry Regulatory Authority – released its 2021 Report on FINRA’s Examination and Risks Monitoring Program on February 1. The report identifies the applicable rule and key related considerations for member firm compliance programs. It also summarizes noteworthy findings from recent examinations and outlines effective practices that FINRA observed during its oversight. Finally, it provides additional resources that may be helpful to member firms.

At forty-six pages the report covers an extensive list of compliance items including firm operations, communications and sales practices, market integrity and financial management. Helpfully, FINRA includes a section on how to use the report to assess and enhance firms’ compliance programs.

Application to firms undertaking private placements

Firm operations

The section of the report covering firm operations applies to FINRA members firms regardless of business activity. The operations applicable to firms undertaking private placements FINRA highlights in the report are:

  • Anti-money laundering
  • Cybersecurity and technology governance
  • Outside business activities and private securities transactions
  • Books and records
  • Regulatory events reporting
  • Fixed income mark-up sales

Communications and sales

Not surprisingly FINRA identifies Reg BI and Form CRS in the ‘Communications and Sales’ section of the report. The SEC’s Office of Compliance Inspections and Examinations previously released a Risk Alert addressing Reg BI and Form CRS following the compliance date of June 30, 2020. Clearly Reg BI and Form CRS compliance will remain at the forefront of FINRA and the SEC’s agenda as increased understanding and solid compliance practices embed.

Additionally, FINRA emphasizes communications with the public under Rule 2210. FINRA’s overarching focus as it relates to communications with the public was on the increased use of digital communication methods.

Finally, FINRA specifically addressed private placements spelling out (1) firms’ regulatory obligations, (2) related considerations, (3) exam findings and (4) effective practices.

Looking a little closer at the latter two items FINRA identified the following exam findings and effective practices.

Exam findings

  • Firms lacked policies and procedures and supervisory programs to comply with filing requirements and therefore failed to make timely filings.
  • Firms failed to undertake the “reasonable investigation” of private placement offerings prior to recommending the offerings.
  • Firms failed to address red flags identified in third-party due diligence reports such as conflicts of interest or lack of legitimate operating history.

Effective practices

  • Private placement checklist – Creating a checklist with all steps, filing dates, related documentation requirements and evidence of approval.
  • Independent research – Conducting and documenting independent research on material aspects of the offering.
  • Independent verification – Establishing a process for verifying key information of the offering.
  • Mitigating conflicts of interest – Using the reasonable investigation process to mitigate conflicts.
  • Ownership for filings – Assigning responsibility for filings to specific individuals who are trained on the process and firms’ policies.
  • Automate alert system – Creating an automated system to generate alerts for upcoming and due filings.
  • Private placement committee – Creating a committee or formally designating one or more qualified persons to approve private placements.
  • Post-approval process – Establishing post-approval processes and investment limited based on the reasonable investigation
  • Ongoing monitoring – Conducting ongoing monitoring to ascertain whether the offering proceeds were used in a manner consistent with the offering memorandum.

How Bovill can help

We can help you review your policies and procedures across all the areas mentioned in the FINRA report and work with you to address any issues. We can also conduct a mock examination to help you prepare for the real thing.


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