Early in the year, FINRA released their 2022 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 2022, FINRA addresses 21 regulatory areas which are grouped into 4 categories: (1) Firm Operations, (2) Communications and Sales, (3) Market Integrity, and (4) Financial Management. From these 21 regulatory areas, FINRA highlights 7 that they feel are the most important and affect a large portion of member firms, which are as follows:
Reg BI and Form CRS
As with last year, the first item on the list is Regulation Best Interest (“Reg BI”) and Form CRS. During Reg BI’s and Form CRS’ first full calendar year of implementation in 2021, FINRA expanded the scope of its reviews and testing relative to 2020 to execute a more comprehensive review of firms’ processes, practices and conduct in areas such as establishing and enforcing adequate written supervisory procedures (WSPs); filing, delivering and tracking accurate Forms CRS; making recommendations that adhere with Reg BI’s Care Obligation; identifying and mitigating conflicts of interest; and providing effective training to staff.
CAT
The second item listed, which again is the same as last year, is FINRA’s Consolidated Audit Trail (CAT) requirements. FINRA states that they will continues to evaluate member firms that receive or originate orders in National Market System (NMS) stocks, over-the-counter (OTC) equity securities and listed options for compliance with Securities Exchange Act of 1934 Rule 613 and the CAT NMS Plan FINRA Rule 6800 Series. This year’s Report addresses compliance with certain CAT obligations, such as reporting CAT information to the Central Repository and maintaining an effective supervision process (including clock synchronization performed by third-party vendors).
Order Handling, Best Execution and Conflicts of Interest
The next priority, which was moved up the list from last year, is order handling, best execution, and conflicts of interest. FINRA states that assessing firms’ compliance with their best execution obligations under FINRA Rule 5310 (Best Execution and Interpositioning) is one of the cornerstones of FINRA’s oversight activities. This oversight has evolved with changes in firms’ business models, for example the advent of the “zero commission” model.
As with last year, FINRA launched a targeted exam to “evaluate the impact that not charging commissions has or will have on the member firms’ order-routing practices and decisions, and other aspects of member firms’ business.”, and will share its findings with member firms at a future date.
Mobile Apps
The next priority is new to the 2022 report and is in response to the rise of mobile apps’ use for communication between firm’s and their clients. FINRA has identified significant problems with some mobile apps’ communications with customers and firms’ supervision of activity on those apps (particularly controls around account openings). FINRA has also observed mobile apps making use of social media to acquire customers, and recently initiated a targeted exam to assess firms’ practices in this area, including with respect to firms’ management of their obligations related to information collected from those customers and other individuals who may provide data to firms.
Special Purpose Acquisition Companies (SPACs)
Another priority new to the 2022 report is Special Purpose Acquisition Companies (SPACs). This is due to rising use in bringing companies public. FINRA recognizes how SPACs can provide companies with access to diverse funding mechanisms and allow investors to access new investment opportunities; however, as SPAC activity has increased, so too has FINRA’s focus on broker-dealers’ compliance with their regulatory obligations in executing SPAC transactions. In October 2021, FINRA launched a targeted exam to explore a range of issues, including how firms manage potential conflicts of interest in SPACs, whether firms are performing adequate due diligence on merger targets and if firms are providing adequate disclosures to customers.
Cybersecurity
Cybersecurity threats are one of the primary risks firms and their customers face. Over the past year, FINRA has continued to observe increases in the number and sophistication of these threats. FINRA will continue to assess firms’ programs to protect sensitive customer and firm information, as well as share effective practices firms can employ to protect their customers and themselves. Where appropriate, FINRA will also share information about cybersecurity threats to firms.
Complex Products
FINRA will continue to review firms’ communications and disclosures made to customers in relation to complex products, and will review customer account activity to assess whether firms’ recommendations regarding these products are in the best interest of the retail customer given their investment profile and the potential risks, rewards and costs associated with the recommendation. In addition, in August of last year, FINRA launched a targeted exam to review members’ practices and controls related to the opening of options accounts which, in some instances, may be used to engage in complex strategies involving multiple options (such as spreads).
If there are any areas from FINRA’s top priorities for 2022 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.
