The self-regulatory organization says that it plans to expand the scope of its Regulation Best Interest and Form CRS reviews and testing this year.
The 2021 Report on FINRA’s Examination and Risk Monitoring Program notes that the organization will continue to focus on assessing whether member firms have implemented policies and procedures to comply with Reg BI and Form CRS, and that it will begin to apply a more comprehensive review of firm processes, practices and conduct.
“As always, FINRA will take appropriate action in the event we observe conduct that may cause customer harm, would have violated previous standards (e.g., suitability), or indicates a clear disregard of the requirements of Reg BI and Form CRS,” the organization advises.
The report is intended to inform member firms’ compliance programs by providing annual insights from FINRA’s ongoing regulatory operations. This year’s report combines and replaces two previously published annual reports, the Report on Examination Findings and Observations and the Risk Monitoring and Examination Program Priorities Letter.
“FINRA continues to identify new ways to provide member firms with information they can use to assess and strengthen their compliance, supervisory and risk management programs,” says Bari Havlik, Executive Vice President, Member Supervision. “This report is designed to give member firms a single, authoritative source that provides insights derived both from the last year’s examinations and risk assessments, and from where we have identified emerging issues for the coming year.”
The questions outlined in the Reg BI and Form CRS section that FINRA staff will ask when examining a firm for compliance include:
- Does your firm have policies, procedures and controls in place to assess recommendations using a best interest standard?
- Do your firm and your associated persons apply a best interest standard to recommendations of types of accounts and recommendations to roll over or transfer assets from one type of account to another?
- Do your firm’s policies, procedures and controls continue to address compliance with FINRA Rule 2111 (Suitability), which still applies to recommendations made to non-retail investors?
- Does the firm place any material limitations on the securities or investment strategies involving securities that may be recommended to a retail customer, and if so, does the firm address and disclose such limitations?
- Does your firm have policies and procedures to identify and address conflicts of interest?
Additional Areas
In addition to Reg BI, the report addresses 17 regulatory areas organized into four categories: Firm Operations, Communications and Sales, Market Integrity and Financial Management, including:
- Consolidated Audit Trail compliance;
- cybersecurity;
- communications with the public;
- best execution;
- variable annuities; and
- anti-money laundering.
Communications and Cybersecurity
In the communications realm, FINRA notes that it is increasingly focused on communications relating to certain new products, and how member firms supervise, comply with recordkeeping obligations and address risks relating to new digital communication channels.
“This focus includes risks associated with app-based platforms with interactive or ‘game-like’ features that are intended to influence customers, their related forms of marketing, and the appropriateness of the activity that they are approving clients to undertake through those platforms (e.g., under FINRA Rule 2360 (Options)),” the report states.
FINRA notes that it will also adapt the areas of focus for its Examinations and Risk Monitoring programs during 2021 to address emerging regulatory concerns and risks for investors that may arise throughout the year.
This report does not address exam findings and observations in relation to how firms adjusted their operations during the pandemic. FINRA says those reviews are underway and will be addressed in a future publication.
FINRA does reminds firms in the cybersecurity section to beware of fraud during the pandemic given the increase in remote work and virtual client interactions, combined with an increase in cyber-related crimes. As such, it encourages member firms to review the considerations, observations and effective practices outlined in the report.
