Finra focuses exam priorities on investor-protection threats

Online distribution of private placements pops up; exchange-traded products cause suitability worries

Jan 22, 2019 @ 2:07 pm

By Mark Schoeff Jr.

Emerging investor-protection threats like the online sale of unregistered securities, and other topics such as whether new exchange-traded products are suitable for customers, are highlights of this year's Finra examination priorities list.

In its 2019 Risk Monitoring and Examination Priorities Letter, the Financial Industry Regulatory Authority Inc. highlights internet sales of private placements, mark-up and mark-down disclosures for fixed-income products and regulatory technology as brand-new targets.

Within annual focus areas, Finra outlines new topics that will draw attention.

For instance, suitability is again on the exam list. This year, Finra is targeting overconcentration of illiquid securities, such as variable annuities, non-traded alternative investments and private placements, as well as recommendations of high-fee mutual fund share classes that don't align with a customer's investment objectives.

(More: SEC exams to focus on investor fees, adviser conflicts of interest in 2019)

Another repeat topic on the priority list is senior investor protection. This year, Finra is monitoring for compliance with new rules about obtaining trusted contacts for elderly investors and putting temporary holds on suspicious account distributions. The regulator is also zeroing in on situations where a broker has power of attorney or is a trustee for an older client.

The whittled-down approach seems to have emerged from the Finra 360 self-review.

"While we will continue to review and examine for longstanding priorities discussed in greater detail in past letters, we agree with the suggestion from many of our member firms that a sharper focus on emerging issues will help them better determine whether those issues are relevant to their businesses and how they should be addressed," Finra chief executive Robert Cook said in a statement.

The streamlined priority list, which totaled seven pages, was welcomed by compliance attorneys. Last year's list came in at 11 pages, while the 2017 roster was 14 pages.

"It's great they are no longer using an everything-but-the-kitchen-sink approach," said Brian Rubin, a partner at Eversheds Sutherland and a former Finra deputy chief counsel of enforcement. "Some of the prior letters contained far too many subjects for firms to focus on."

Emily Gordy, a partner at McGuireWoods, said the shortened priority list illustrates that Finra is in the process of taking a more holistic approach to risk monitoring and exams and creating a unified operation out of what used to be spread across many parts of the organization. This change of direction will help clarify for members what concerns Finra most.

"It tells firms where they need to look to assess their own regulatory procedures and controls," said Ms. Gordy, a former Finra deputy of enforcement.

(More: Mandatory arbitration isn't just for brokers — some investment advisers rely on it)

The short exam priority list shows that Finra is trying to keep pace with the industry, said Susan Grafton, a partner at Dechert.

"Finra has adapted its practices to reflect changes in the business, whether it's the increasing use of technology, development of novel products — including cryptocurrencies — or the aging population," she said.

The new emphasis on regulatory technology signals that Finra is taking a hard look at how firms utilize software to perform compliance functions. The regulator doesn't want them to cut corners.

"That reflects a long-standing view that you can't outsource compliance," Ms. Grafton said.


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