Early in the year, FINRA released their 2021 Report on FINRA’s Examination and Risk Monitoring Program, which is designed to inform member firms’ compliance programs by providing annual insights from FINRA’s ongoing regulatory operations.
In this report detailing FINRA’s top priorities for 2021, FINRA addresses 18 regulatory areas which are grouped into 4 categories: (1) Firm Operations, (2) Communications and Sales, (3) Market Integrity, and (4) Financial Management. From these 18 regulatory areas, FINRA highlights 6 that they feel are the most important and affect a large portion of member firms, which are as follows:
Regulation Best Interest (Reg BI) and Form CRS
The first item on the list is Regulation Best Interest (“Reg BI”) and Form CRS. There main focus within this area is ensuring firms have established and implemented policies, procedures, and a system of supervision reasonably designed to comply with Reg BI and Form CRS. Going forward, FINRA intends to expand the scope of their Reg BI and Form CRS reviews and testing to effect a more comprehensive review of firm processes, practices and conduct. Also, FINRA states that they will take action in the event they observe conduct that may cause customer harm, would have violated previous standards like suitability, or indicates a clear disregard of the requirements of Reg BI and Form CRS. For more information regarding this topic, visit FINRA’s Reg BI Topic Page.
Consolidated Audit Trail (CAT)
After that, we have FINRA’s CAT requirements, where all member firms that receive or originate orders in National Market System (“NMS”) stocks, over-the-counter (“OTC”) equity securities or listed options must report to CAT. This includes all proprietary trading activity, including market making activity, and there are no exclusions or exemptions for size or type of firm or type of trading activity. FINRA recommends that member firms review the list of recommended steps provided in Regulatory Notice 20-31, FINRA Reminds Firms of Their Supervisory Responsibilities Relating to CAT, and the list of considerations and relevant resources provided in their report when assessing the adequacy of their CAT compliance programs.
The pandemic that lasted the majority of 2020 forced many member firms to temporarily close their offices and switch to working remotely, which has led to an increase in occurrences of cybersecurity related issues. In 2021, FINRA will be focusing on ensuring that member firm’s cybersecurity programs are reasonably designed and tailored to the firm’s risk profile, business model and scale of operations. FINRA also made a note that when they are reviewing cybersecurity programs, they will be checking that they are compliant with business continuity plan requirements and the SEC’s Regulation S-P Rule 30.
Communications with the Public
The next key area is communications with the public, where FINRA is focused on reviewing member firms’ communications relating to complex products, as well as the information firms convey to senior and vulnerable investors. FINRA continues to evaluate member firms for compliance with FINRA Rule 2210 (Communications with the Public), which includes principles-based content standards that are designed to apply to ongoing developments in communications technology and practices. They are also increasingly focused on communications relating to certain new products, and how member firms supervise, comply with record keeping obligations, and address risks relating to new digital communication channels.
FINRA will continue to focus on potential conflicts of interest in order-routing decisions, appropriate policies and procedures for different order and security types, and the sufficiency of member firms’ reviews of execution quality. They also conducted a targeted review of member firms that do not charge commissions for customer transactions (“zero commission” trading) to evaluate the impact that not charging commissions has or will have on member firms’ order-routing practices and decisions, and other aspects of member firms’ business.
FINRA continues to evaluate variable annuity exchanges under FINRA Rule 2330 (Members’ Responsibilities Regarding Deferred Variable Annuities) and, when applicable, under Reg BI. In early 2020, FINRA engaged in an informal review of buyout written supervisory procedures (WSPs), training, and disclosures for member firms whose customers were impacted by a recent announcement from an insurer with sizable variable annuity assets stating it will terminate servicing agreements, cancel certain trail commissions for registered representatives, and provide buyout offers to its variable annuity customers. In addition to reviewing considerations and findings provided in the Report, we encourage member firms to consider the effective practices we identified as part of this particular review.
If there are any areas from FINRA’s top priorities for 2021 that you need help understanding or implementing, please contact us. MasterCompliance provides expert consulting, outsourcing, and implementation tools in planning and budgeting your firm’s compliance responsibilities.