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SEC and FINRA Set Examination Priorities For 2019
What you need to know
The Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (OCIE) recently published its 2019 Examination Priorities. Accordingly, OCIE has identified the following six themes affecting broker-dealers and investment advisers, which include both longstanding and emerging risk areas:
Retail investors, including seniors and those saving for retirement
OCIE will continue to focus on fees and expenses charged to advisory accounts, conflicts of interest, portfolio management, never-before or not recently-examined investment advisers, senior investors and retirement accounts, mutual funds and exchange-traded products, municipal advisers, broker-dealers entrusted with customer assets, and microcap securities.
Compliance and risk in registrants responsible for critical market infrastructure
OCIE continues to focus on firms that are essential to facilitating, maintaining and/or operating the integrity and functioning of the financial markets. For example, clearing firms, securities exchanges, transfer agents, and compliance with Regulation SCI, which requires written policies and procedures surrounding technology and systems infrastructure.
Focus on FINRA and MSRB
OCIE continues to focus on the effectiveness of operations and regulatory programs, and the quality of examinations performed by FINRA and MSRB.
Digital Assets
Given the significant growth and risks presented in this market, OCIE will continue to monitor the offer and sale, trading and management of digital assets. And where the products are treated as securities, examine for regulatory compliance. For broker-dealers, trading platforms, and investment advisers actively engaged in the digital asset market, OCIE will be conducting examinations. These examinations will be focused on portfolio management of digital assets, trading, safety of client funds and assets, pricing of client portfolios, compliance, and internal controls.
Cybersecurity
OCIE will focus on proper configuration of network storage devices, information security governance, and policies and procedures related to retail trading information security. Specific to investment advisers, OCIE will emphasize cybersecurity practices at investment advisers with multiple branch offices, including those that have recently merged with other investment advisers, and continue to focus on governance and risk assessment, access rights and controls, data loss prevention, vendor management, training, and incident response.
Anti-money laundering programs
Examination of broker-dealers will focus on compliance with anti-money laundering (AML) obligations, including whether they are meeting their Suspicious Activity Report (SAR) filing obligations, implementing all elements of their AML program and conducting independent tests of their AML program in a comprehensive and timely fashion. The goal of these examinations is to make sure that broker-dealers have policies and procedures in place that are reasonably designed to identify suspicious activity and illegal money laundering activities.
FINRA Examination Priorities
FINRA similarly published its 2019 Annual Risk Monitoring and Examination Priorities Letter on January 22, 2019. This year’s edition broadened the scope of the letter beyond specific examination topics to include areas of focus on risk monitoring. In large part, firms can expect more of the same with regards to the content published by FINRA, however the following three “Highlighted Items” have been identified as emerging areas of emphasis:
- Online distribution platforms
FINRA is focusing on the distribution of securities through online platforms in reliance on Rule 506(c) of Regulation D and Regulation A under the Securities Act of 1933. While some online distribution platforms are owned and operated by broker-dealers, others “are operated by unregistered entities, which may use member firms as selling agents or brokers of record, or to perform activities such as custodial, escrow, back-office and financial technology (FinTech)-related functions.”
There is a stated concern that some member firms assert they are not selling or recommending securities when involved with online distribution platforms despite evidence to the contrary, including handling customer accounts and funds, or receiving transaction-based compensation.
- Fixed income mark-up disclosure
FINRA will review firms’ compliance with their mark-up or mark-down disclosure obligations on fixed income transactions with customers pursuant to amendments to FINRA Rule 2232 (Customer Confirmations) and MSRB Rule G-15, which became effective on May 14, 2018.
- Regulatory technology
Regulatory technology (RegTech) tools carry the promise of efficiency, however FINRA has identified that firms relying on such technology will be engaged on how related risks, challenges or regulatory concerns are being satisfied.
How we can help
Bovill has deep experience in supporting clients to make sure that regulatory aspects are properly managed in advance of an examination or audit. As part of our ongoing support services, we can help you understand your firm’s regulatory exposure and any examination implications, then deliver the associated organizational change and test the resulting systems and processes. We can also carry out a health check to see whether existing practices are being managed and monitored in a way that safeguards compliance and minimizes risk.
Get in touch to explore how we can work together.
