On January 6, 2015 FINRA published its 10th annual Regulatory and Examinations Letter.
Although 17 pages and dense, when broken down it is a roadmap for broker-dealers as to actions they can take now to reduce regulatory risk in 2015. Most broker-dealers can address many of the recommendations with ease.
This article is not a summary of the letter; instead it is a guide to assist broker-dealers in addressing topics raised. A good practice for Chief Compliance Officers (“CCOs”) is to perform a gap analysis of the topics discussed vis-à-vis their firms’ current practices, and begin addressing gaps identified immediately.
Several themes emerged, and Compliance Departments should ensure their programs are appropriately weighted towards these themes. Themes included: conflicts of interest, improved and increased surveillance, supervision, review of new products and continuous monitoring of existing products.
Additionally, there were several significant items that warrant highlighting. These include: responding completely and timely to FINRA inquiries, the new FINRA audit trail team, and the focus of FINRA to review surveillance parameters. In the past, FINRA has been willing to offer extensions and except partial responses piecemeal. In the letter, FINRA warned firms that production failures would expose them to disciplinary action. FINRA has also created a new team to focus on identifying OATS issues, and FINRA will continue to focus on late reporting in TRACE.
Firms must continue to focus on OATS and TRACE reporting, and should expect to see more robust FINRA scrutiny relating to trade reporting in general. OATS and TRACE should be risk-rated appropriately, and firms should ensure that they have adequate supervision, surveillance and testing. Moreover, FINRA repeatedly points out the need to enhance over-all surveillance programs. No longer will it be enough to provide surveillance reports with exceptions; FINRA will now be looking at the methodology underpinning the reviews as well as the process for escalating exceptions.
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