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FINRA Announces Exam Priorities for 2017

By George C. Miller, Esq. of Shustak Reynolds & Partners, P.C. posted on Friday, January 6, 2017.

George C. Miller, Esq.
619.696.9500 ex. 105
[email protected] 

Each year, the Financial Industry Regulatory Authority (FINRA) outlines its core areas of focus through its annual Regulatory and Examination Priorities Letter. It should come as no surprise that this year’s priorities include an expanded focus on compliance, supervision and risk management. Here are FINRA’s top priorities for 2017:

          1. High risk and recidivist brokers. FINRA pledges to devote new attention to high-risk brokers—those with existing disclosures and prior regulatory issues—and member firms’ supervision of them. FINRA will expand its review of high-risk brokers’ communications with the public and trading activity and review the supervisory policies and procedures of the firms who employ them. FINRA will focus its reviews on firms’ supervision of account activity, advertising and communications and the use of social media, which has become an increasingly popular method of communication.

          2. Sales practices. FINRA will assess firms’ controls to protect senior investors from fraud, abuse and improper advice. There are approximately 10,000 baby boomers who are set to retire each day over the next 15 years. Protection of senior investors and retirement funds is a core area of focus for FINRA. The regulator will place particular emphasis on microcap or “penny stock” fraud schemes, suitability and concentration issues and short term trading of products intended to be held long term, including certain mutual fund share classes.

          3. Financial risks. In 2016, FINRA assessed firm liquidity management practices and identified certain firms that either lacked liquidity management plans or did not perform proper stress testing. Liquidity has been an area of focus since the economic downturn. For 2017, FINRA will expand its liquidity-focused reviews to determine whether firms are appropriately managing financial risk through written policies and procedures, including credit risk policies and risk limit determinations under FINRA Rule 4210.

          4. Operational risks. FINRA has repeatedly cautioned firms that they must have appropriate cybersecurity measures in place. The issue is if, not when, a financial firm will face a cyber-attack. FINRA has noted particular concern in individual branch offices, where cybersecurity protocols are more lax when compared to home office locations, and record preservation policies under the Securities Exchange Act Rule 17a-4(f). Finally, FINRA will focus on segregation of client assets (an issue uniquely important to RIA firms and their advisors) and anti-money laundering (AML) and suspicious activity red flag monitoring.

          5. Market integrity. Finally, FINRA will expand its efforts to detect market manipulation and trade layering as well as compliance with best execution protocols. FINRA also announced that it will initiate electronic, off-site reviews to supplement traditional on-site examinations. This will allow FINRA to review more offices and advisors throughout the year and, ultimately, lead to greater investor protection. 

When faced with a FINRA or SEC examination, investigation or enforcement proceeding, it is important to have competent counsel on your side. Shustak Reynolds & Partners P.C.’s San Diego and Southern California FINRA, SEC and financial services attorneys have extensive experience representing financial advisors, RIA firms, hedge funds and other financial professionals in a variety of securities matters, including FINRA arbitrations and FINRA and SEC examinations, investigations and enforcement actions. Contact us today for a confidential consultation.  

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