FINRA has released their 2016 Regulator and Examination Priorities Letter, highlighting three areas of focus for the New Year. Supervision, risk management and controls, and liquidity are sited as overarching themes of the letter. There will also be increased scrutiny regarding culture, conflicts of interest and ethics, and the significant role each of these issues play in how a firm is conducting business.
Other areas of priority in 2016 will include:
- Firms’ monitoring of excessive concentrations and recommendations, particularly regarding complex, speculative or illiquid products;
- Seniors and vulnerable investors;
- Private placements and Regulation A+ offerings;
- Fixed income securities, including excessive charges;
- Market integrity, including the Vendor Display Rule, market access, fixed-income order handling, Regulation SHO, and manipulation across markets and products; and
- Financial and operational controls relating to exchange-traded funds and fixed-income prime brokerage.
As it pertains to supervision, risk management and controls, FINRA maintains that examinations will emphasize review of AML policy and programs, cyber-security, management of conflicts of interest in technology, outsourcing, and data quality.
With regard to liquidity, the area of interest is the firms’ adequacy in contingent funding plans as it relates to their business model and in connection with testing for market stresses. High frequency-trading trading firms will obviously be of special interest as it pertains to liquidity planning and controls in place.
These broad issues have become areas of focus as result of FINRA’s conclusion that “Some firms continue to experience systematic breakdowns manifested through significant violations due to poor cultures of compliance,” according to FINRA Chairman and CEO Richard Ketchum.
When FINRA discusses firm compliance culture, these five indicators are being assessed:
- Whether control functions are valued within the organization;
- Whether policy or control breaches are tolerated;
- Whether the organization proactively seeks to identify risk and compliance events;
- Whether immediate managers are effective role models of firm culture; and
- Whether sub-cultures that may not conform to overall corporate culture are identified and addressed.
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