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FINRA 2019 Exam Priorities Target Risk Monitoring, Suitability Analysis

Investment suitability will remain one of FINRA’s top examination priorities, but the organization will also target broker-dealers’ use of online distribution platforms, due diligence compliance and risk disclosure obligations as part of its expanded areas of focus.

In the organization’s 2019 Risk Monitoring and Examination Priorities Letter, FINRA explains that unlike previous priorities letters, it does not repeat topics that have been mainstays of attention over the years. Nonetheless, the letter advises, firms should expect that FINRA will review those topics for compliance in 2019.

“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,” notes FINRA CEO Robert Cook.

Accordingly, firms should expect ongoing review of suitability determinations, outside business activities and private securities transactions, private placements and best execution. FINRA will also continue to review sales practice risks, broker-dealer firms’ compliance with hiring and supervision of persons with a problematic regulatory history, cybersecurity and fraud, and insider trading and manipulation across markets and products.

As for suitability, specific areas FINRA will focus on this year include:


  • deficient quantitative suitability determinations or related supervisory controls;

  • overconcentration in illiquid securities, such as variable annuities, non-traded alternative investments and securities sold through private placements; and

  • recommendations to purchase share classes that are not in line with the customer’s investment time horizon or hold for a period that is inconsistent with the security’s performance characteristics.


FINRA also plans to evaluate whether firms are meeting their suitability obligations and risk disclosure obligations when recommending exchange-traded products. These include leveraged and inverse exchange-traded funds (ETFs), floating-rate loan ETFs and mutual funds that invest in loans extended to highly indebted companies of lower credit quality.

Fixed Income Mark-Up Disclosure

Firms’ compliance with their mark-up or mark-down disclosure obligations on fixed income transactions with customers is further cited as a top priority. These requirements are pursuant to amendments to FINRA Rule 2232 (Customer Confirmations) and MSRB Rule G-15, which became effective on May 14, 2018.

FINRA also advises that it will review for any changes in firms’ behavior that might be undertaken to avoid their mark-up or mark-down disclosure obligations.

Online Distribution Platforms

While some online distribution platforms are owned and operated by broker-dealers, others are operated by unregistered entities, which may use member firms as selling agents or brokers of record, or to perform other activities, the organization explains.

“FINRA is concerned that some member firms assert they are not selling or recommending securities when involved with online distribution platforms despite evidence to the contrary, including handling customer accounts and funds, or receiving transaction-based compensation,” according to Cook.

Consequently, the organization says it will evaluate how firms conduct their reasonable basis and customer-specific suitability analyses, supervise public communications and meet AML requirements.

Senior Investors

FINRA further warns that protection of senior investors – as well as investors who are retired or approaching retirement – remains a top priority. Cook notes that FINRA will continue to focus on how firms are protecting seniors from fraud, sales practice abuses and financial exploitation.

“FINRA will assess firms’ supervision of accounts where registered representatives serve in a fiduciary capacity, including holding a power of attorney, acting as a trustee or co-trustee, or having some type of beneficiary relationship with a non-familial customer account,” he states in the letter.

In particular, FINRA is concerned about registered representatives using their role as a fiduciary to take control of trusts or other assets and direct funds to themselves. As a result, the organization plans to assess the supervisory systems firms employ to place heightened scrutiny over such accounts.

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