FINRA held the first of three podcasts to discuss its "2016 Regulatory and Examination Priorities Letter."
The first podcast addressed: (i) firm culture, (ii) conflicts of interest, (iii) outsourcing, (iv) anti-money laundering and (v) liquidity.
FINRA is formalizing its assessment of firm culture in order to understand how firm culture affects compliance and risk management practices. Specifically, FINRA will assess firm culture by reference to whether (i) control functions are valued within a firm, (ii) whether policy or control breaches are tolerated, (iii) whether a firm proactively seeks to identify risk and compliance events, (iii) whether supervisors are effective firm culture role models, and (v) whether subcultures that may not conform with the overall corporate culture are identified and addressed (e.g., if branch offices, trading desks, or investment banking departments develop cultures of their own).
Conflicts of interest
FINRA is completing a targeted examination on incentive structures and conflicts of interest in connection with firms’ retail brokerage business. This examination is especially focused on conflicts arising from: (i) registered representative compensation, (ii) sale of proprietary products, and (iii) revenue sharing agreements.
FINRA is also focusing on the relationship between research analysts and investment banking departments. FINRA is assessing whether investment banking personnel exercise undue influence on analysts. FINRA is also examining what firms are doing about information leakage within or outside the firms, including leakage of information between trading and other departments, and front-running of pending rating changes.
FINRA is reviewing firms’ due diligence and risk assessment of providers, and looking at how firms supervise those outsourced services. While third parties can perform some tasks, the responsibility for supervision and compliance with applicable regulatory requirements remains with the firm. Further, firms must avoid outsourcing functions that be performed only by FINRA-registered personnel.
FINRA continues to assess the adequacy of firms’ monitoring for suspicious activity, in particular, high-risk customer accounts and transactions. Some examples include cash management accounts that offer banking services to brokerage customers, and transactions in microcap securities.
FINRA continues to be concerned with liquidity, and is particularly focused on liquidity planning and controls at firms that engage in high frequency trading. Given the number of orders these firms have in the market at one time, sudden changes in the firms’ execution rate, whether triggered by a market event or other factors, could create liquidity challenges for the firm.
This year, FINRA will focus its regulatory efforts on the broad categories of supervision, risk management and controls, and liquidity.
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