As part of FINRA’s risk monitoring and examination priorities for 2020, new for this year will be a focus on the SEC’s Regulation Best Interest and Form CRS.
In the organization’s 2020 Risk Monitoring and Examination Priorities Letter, FINRA explains that in the first part of the year it will review firms’ preparedness for Reg BI to gain an understanding of implementation challenges they may face.
After the June 30, 2020 compliance date, FINRA will examine firms’ compliance with Reg BI, Form CRS and related SEC guidance and interpretations. “FINRA staff expects to work with SEC staff to ensure consistency in examining broker-dealers and their associated persons for compliance with Reg BI and Form CRS,” the letter states.
Among the specific factors that FINRA may take into consideration when reviewing firms and associated persons for compliance with Reg BI after June 30, 2020:
- Whether procedures and training are in place to assess recommendations using a best interest standard.
- Whether a best interest standard is applied to recommendations of types of accounts.
- If account monitoring is provided, whether the best interest standard is applied to both explicit and implicit hold recommendations.
- Whether consideration is given to the express new elements of care, skill and costs when making recommendations to retail customers.
- Whether reasonably available alternatives to a recommendation are considered.
- Does the firm and registered representatives guard against excessive trading, irrespective of whether the broker-dealer or associated person “controls” the account?
- Are policies and procedures in place to provide the disclosures required by Reg BI, identify and address conflicts of interest and file, update and deliver Form CRS?
FINRA will also continue to review for firms’ compliance in what the organization deems to be “consistently important areas,” such as systems for supervision, sales practice risks, anti-money laundering and fraud, insider trading and manipulation across markets and products.
The letter emphasizes that these reviews will be performed consistent with the recently announced consolidation of the examination programs into a single framework, where all FINRA member firms are grouped into one of five main firm business models: Retail, Capital Markets, Carrying and Clearing, Trading and Execution, and Diversified.
Among the other issues identified in the 2020 priorities letter are:
- communications with the public, with a focus on private placement retail communications and communications via digital channels;
- cash management and bank sweep programs;
- direct market access controls;
- best execution;
- disclosure of order routing information; and
- cybersecurity.
“In addition to our ongoing oversight activities, FINRA continues to identify new ways to provide firms with information they can use to assess and, if necessary, strengthen their compliance, supervisory and risk management programs,” notes FINRA President and CEO Robert Cook. For example, he notes that this year’s Priorities Letter includes a list of “practical considerations and questions” that firms can use in evaluating these programs, as well as a new appendix with links to additional resources for each priority.
FINRA’s Priorities Letter comes as the SEC also released its examination priorities for 2020, which also include a focus on Reg BI, as well as RIAs that have never been examined or have not been examined for several years.
