2016 FINRA Priorities by Attorney Dan Hill
At the start of each New Year, the Financial Industry Regulatory Authority (FINRA) discloses to the industry what its focus and priorities will be for the coming year. 2016 is no different; however, this year could prove to be interesting. For example, at the top of FINRA’s focus list for 2016 is “firm culture.”
My initial reaction was how the heck can FINRA objectively assess a firm’s culture, and what are they really up to. After reading more thoroughly, FINRA does make clear that it “does not seek to dictate firm culture, but rather to understand how it affects compliance and risk management ….” While helpful, it still does not explain how FINRA plans to objectively evaluate a firm’s culture and what are they really up to.
While I encourage each of you to read carefully FINRA’s 2016 Letter, my very brief summary of the situation is that FINRA’s real focus is on whether firms are taking “visible actions that help mitigate conflicts of interest, and promote the fair and ethical treatment of customers.” In other words, FINRA is doing what FINRA should be doing – looking out for the interests of the investors. A lot, however, remains to be said about whether there’s any real, objective means to assess accurately a firm’s culture, but I think it’s safe to at least conclude that a poor firm culture (e.g., one that does not emphasize compliance and a “client first” mentality) will undoubtedly result in more problems, including conflicts of interest. Should you be so lucky as to have regulators looking at your “firm culture,” they will likely be investigating: how control is valued within your organization; whether violations are tolerated; whether your firm is proactive in trying to identify risks; and whether supervisors are effective role models.
- Managing Conflicts of Interest: FINRA intends to focus on whether firms are taking steps to mitigate conflicts that can arise in such areas as registered rep compensation, the sale of proprietary products and third-party payments. Are you doing anything in this regard? Doing something is better than doing nothing.
- CyberSecurity: FINRA continues to focus on firms’ cybersecurity preparedness. More specifically, FINRA points out that firms “face risks from unauthorized internal and external access to customer accounts, online trading systems and asset transfer systems.” What are you doing to protect your data and systems?
- Outsourcing: While certain tasks can be outsourced to third party vendors, the responsibility to supervise those third parties remains with the firm. What are you doing to supervise your vendors? FINRA also notes that functions required to be performed by qualified registered persons cannot be outsourced.
- Suitability: As always, FINRA remains focused on suitability issues. Of particular note this year is planned attention on whether and how firms monitor accounts for excess concentration, as well as new product review and training. What is your firm doing to review accounts for excess concentration? What are you doing to understand new products? What are you doing to educate your personnel on new products?
- Transmittal of Customer Funds: Related to cybersecurity issues – at least in my mind, FINRA will be paying particular attention to what supervisory controls are in place, and what tests and verification processes are being run, to prevent the improper transfer of customer funds from the firm to (1) third party accounts, (2) outside entities, (3) places other than the customer’s primary residence and (4) to registered representatives. Again, what are you doing?
As always, if you have any further questions or concerns, or would like a copy of FINRA’s 2016 Letter, please let me know.
Happy New Year!
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