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FINRA’s not dead yet! Will you still be a target in 2018?

In its 2018 Regulatory and Examination Priorities Letter released early last week, the Financial Industry Regulatory Authority (FINRA) identified issues the Authority will focus on in the coming year, and among the newest regulatory foci are cybersecurity and money laundering challenges, as well as some ongoing favorites like outside business activities (OBA), branch audits, fraud, and the usual suspects at high risk broker-dealers, etc. Key is to put compliance professionals like you on alert and to encourage management to enhance their firm’s compliance, supervisory and risk management programs to prepare for their FINRA examination.

FINRA Rules 3270 and 3280 require registered representatives to notify their firms of proposed outside business activities (OBAs), and all associated persons to notify their firms of proposed private securities transactions (PSTs), to permit a determination of whether to limit or allow those activities to proceed. The goal, of course, is to identify those OBAs and PSTs that could potentially involve misconduct or create conflicts of interest and expose firms and customers to potential risks. According to FINRA, the notifications its rules require are designed to assist firms in identifying and determining how to mitigate those risks. Mitigation can include placing conditions or limits on, or prohibiting, participation in the proposed OBA or PST.

Do compliant branches matter?

Of course, they do. According to FINRA, firms with effective programs to manage OBAs and PSTs not only implemented proactive compliance efforts at the central office but also particularly at the branch level. Moreover, firms with the least exposure used frequent training to make registered or associated persons aware of their responsibilities with respect to OBAs and PSTs, including the requirements to provide a firm prior written notice of a proposed activity. These firms also required that members regularly complete open-ended questionnaires and attestations regarding their involvement—or potential involvement in OBAs and PSTs.

For noncompliant members, these firms also implemented tools to identify individuals involved in undeclared OBAs and PSTs. Tactics included: monitoring correspondence, fund movements, marketing materials, employee online activities, customer complaints and also monitoring for evidence of involvement in OBAs or PSTs the firm had prohibited.

What did FINRA find in 2017?

In retail brokerage firms of all sizes, FINRA individuals at the firm, professionals associated with a firm, and even firm management which failed to meet one or more of their obligations under its rules. Most common exposures:

  • Notice – Some individuals failed to notify their firms of proposed OBAs or PSTs. This included instances where new hires or current registered or associated members failed to notify prospective or current firms in writing of an existing OBA or PST. In some cases, the member did not understand what constituted an OBA or PST, or gave verbal rather than the required written notice. In other cases, insufficient information was provided for the firm to adequately determine whether a proposed OBA or PST should proceed.
  • OBA and PST Notice Reviews – Some firms’ OBA and PST review processes were weak. Either they did not have written supervisory procedures for such reviews or the procedures were inadequate. Some had well-designed procedures but executed them poorly. They lacked supporting documentation or failed to execute reviews with sufficient depth. Others construed “compensation” too narrowly and erred in determining an activity was not a PST, or approved participation in a proposed transaction without adequately considering whether they could supervise the transaction.
  • Post-PST Approval – Once PSTs were approved, FINRA found that some firms did not fully understand the activity and could not exercise effective supervision. Others failed to retain necessary documentation. Still others had difficulty recording the transactions on their books and records they may not have fit easily into the firms’ systems. Some firms failed to monitor the limitations established for a PST, such as a prohibition on a registered representative soliciting firm clients to participate.

What does FINRA consider high risk?

In 2018, FINRA will focus on firms’ hiring and supervisory practices for high-risk brokers, including. Key areas include firms’ remote supervision arrangements; supervision of point-of-sale activities, including individual broker accountability when using joint rep codes; and branch inspection programs.

The Authority also will focus on the risks that these firms and brokers pose to investors, including unsophisticated or senior investors, as well as registered representatives who conduct approved private securities transactions by raising funds from investors they serve away from their firm. FINRA will also continue to review firms’ controls regarding the outside business activities of members, including to identify instances of settling away where registered representatives borrow money from their customers or make payments to customers from their outside business bank accounts.

Forewarned is forearmed

There is no upside to being the last to know what your people are up to. FINRA knows you cannot lock your people in their offices, so its intention is to provide guidelines to help compliance professionals manage the supervisory process. That’s our goal too! So, let’s talk about how you can keep your organization on the “straight and narrow” (no matter what FINRA throws at you) efficiently and cost-effectively. So, let’s talk. Call 212-233-1155 to ask about Patrina’s cost-effective and comprehensive, 8-module compliance solution, and compliant data capture, file storage, and records archiving specifically designed for the financial services community. Be smart. Be covered.

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