FINRA Highlights 2018 Compliance, Supervisory and Risk Management Priorities

In an annual Regulatory and Examination Priorities Letter, FINRA outlined key areas of focus for 2018. FINRA urged firms to use the Letter as a "point of reference for their compliance supervisory and risk management programs and to prepare for FINRA examinations."

FINRA identified several areas of focus, including:

  • Business Continuity Planning. In light of recent natural disasters, FINRA will review firms' business continuity plans with a focus on implementation of the plans, as well as firms' plans for restoring systems, procedures and records when they are set to resume normal business activities.

  • Technology Governance. FINRA will review firms' information and technology change management policies and procedures in order to ensure that they are equipped to avoid detrimental changes to their production environments.

  • Short Sales. FINRA will review firms' policies and procedures to determine whether they are calculating short-sale rates charged to customers in a manner consistent with their procedures.

  • Initial Coin Offerings ("ICOs") and Cryptocurrencies. FINRA will monitor developments, including the role of firms and registered representatives in effecting cryptocurrency and ICO-related transactions. Where digital assets are securities or an ICO involves securities, FINRA will review a firm's supervisory, compliance and operational infrastructures to ensure compliance with applicable rules and regulations.

  • Securities-Backed Lines of Credit ("SBLOCs"). FINRA will evaluate firms' disclosures to customers on risks associated with SBLOCs, including the possible effects of a market downturn, tax implications if pledged securities are liquidated, and the potential impact of an increase in interest rates.

  • Use of Margin. FINRA will assess firms' disclosure and supervisory practices related to margin loans, and evaluate whether firms and registered representatives adequately disclose margin loan risks and maintain controls designed to prevent excessive margin trading.

  • Options. With respect to options trading, FINRA will focus on (i) its surveillance program to identify front-running activity, (ii) "marking the close" activity, and (iii) violations of Exchange Act Rule 14e-4 (requiring that participants in partial tender offers tender no greater than their "net long positions").

In addition, FINRA highlighted new rules that are set to become applicable in the coming year, and advised that it may discuss with some firms the steps they are taking to implement those firms' obligations under the new rules. FINRA also pledged a continued focus on customer protection, cybersecurity, anti-money laundering programs, liquidity risk, suitability, market manipulation, best execution, Regulation SHO, fixed income data integrity, market access and alternative trading systems.

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