FINRA Adds New Topic Areas in Annual Report on Exam and Risk Monitoring Program
Commentary by Steven Lofchie
In its 2023 Examination and Risk Monitoring Program Report, FINRA provided insights and observations across 24 core compliance topics.
FINRA added four topics not included in last year's report (see previous coverage): (i) manipulative trading (which is part of the newly added Financial Crimes section), (ii) fair pricing of fixed income securities, (iii) fractional shares and (iv) Regulation SHO.
In the report, FINRA identifies rules relevant to each topic and sets out issues for member firms to consider in maintaining compliance programs. The report also includes noteworthy findings from supervisory examinations, as well as effective practices that FINRA observed during its oversight. FINRA also provided member firms with resources to help review procedures and fulfill compliance obligations.
Key topics of the report include:
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cybercrime, which remains a prevalent threat and one of the most significant risks that both customers and firms face today, especially as the frequency, sophistication and variety of attacks continue to increase;
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complex products, specifically how firms disclose them to customers and whether recommending them is in the best interest of the customer;
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Regulation Best Interest and Form CRS, including (i) methods to identify conflicts of interest and how to disclose those conflicts to customers and (ii) establishing and enforcing supervisory procedures;
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trading for customers, including best execution and dealing with conflicts of interest (e.g., payment for order flow); and
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mobile apps intended to encourage retail investors to trade (i.e., gamification of providing investor information).
FINRA said that the report is intended to be an up-to-date, evolving resource or library of information for firms.
Commentary
This is an important and detailed report. FINRA should be commended for its production. The very detail and scope of the report demonstrates how great are the regulatory burdens imposed on firms, not only as to their own conduct, but also as to surveillance on their customers. The report demonstrates the challenge firms - particularly smaller firms - face in their efforts to keep up.