FINRA Podcast: The Requirement to Conduct Internal Investigations into Red Flags Relating to Investment Banking - Part 4 (with Bondi Comment)
FINRA released the fourth podcast in a five-part series about FINRA's new Consolidated Supervision Rules. This podcast focuses on transaction review and reporting under new FINRA Rule 3110.
FINRA explained that firms must review transactions in certain categories of accounts that include (i) firms' accounts; (ii) accounts introduced or carried by a firm in which a person associated with that firm has a beneficial interest or the authority to make investment decisions; (iii) any associated person accounts; and (iv) covered accounts.
FINRA noted that, although there is no obligation for firms to conduct reviews in a certain way, if a firm identifies a trade that it believes to have violated laws or rules, it must promptly conduct an internal investigation. FINRA recommended that firms maintain additional written procedures, including guidelines or criteria for taking reasonable follow-up steps to decide which trades merit further investigation.
With regard to reporting requirements, FINRA reminded members that each firm involved in investment banking must file written reports with FINRA about internal investigations, and that the reports must be signed by a senior officer.
FINRA also reminded firms that they are considered to be engaging in investment banking services when they act as financial advisors in mergers or acquisitions, and must submit written reports to FINRA within 10 business days of the end of each calendar quarter. Such reports must contain a description of each internal investigation started in the previous quarter and include the firm's identity, each investigation start date and status and, if ended, how the investigation was resolved.
Bondi Comment: This podcast is another example of FINRA's significant outreach effort to educate members and provide clear guidance. It would be a positive development if the SEC could provide a similar level of detail concerning its rules.Substantively, FINRA Rule 3110's requirement to disclose internal investigations into suspicious trades may chill firms from actually conducting those investigations, even though required to do so under the Rule.
See: Transcript of Podcast; Podcast.Related news: FINRA Podcast: Inspection Requirements - Part 3 (October 8, 2014); FINRA Podcast: Reviewing Correspondence, Communications and Complaints - Part 2 (September 24, 2014); FINRA Podcast: Primary Supervision Requirement- Part 1 (September 18, 2014).