Part 2: Broker-Dealers – What’s Your Priority for 2014?

FINRA followed-up on its October 2013 Report on Conflicts of Interest report by further highlighting that examiners will be reviewing firms conflict management practices and the potential impact on customers.  Sales efforts for proprietary products or other products for which the firm may have revenue-sharing agreements will be closely scrutinized to determine whether firms are pushing the sale of such products.

The SEC also highlighted conflict of interests inherent in certain investment advisor business models.  SEC examination staff will focus on adviser compensation arrangements, allocation of investment opportunities, controls and disclosure associated with various fee structures, risk controls and disclosure for leveraged and illiquid products and higher risk products marketed to retail investors.

Anti-Money Laundering – Specialization and Surveillance

No surprise here – fresh off FINRA’s announcement that it will be expanding its new specialized anti-money laundering examinations team to eight people from five, FINRA and the SEC reemphasized their focus on AML issues associated with institutional business.  FINRA has identified issues where customers liquidate large blocks of low-priced securities through delivery versus payment/receipt versus payment (DVP/RVP) accounts raising red flags for AML and Section 5 of the Securities Act of 1933.  Firms that conduct business in low priced securities should consider the red flags outline in FINRA’s Regulatory Notice 09-05.  The SEC has identified proprietary trading firms that give customers direct market access from higher risk jurisdictions as an AML risk that they will focus on in the coming year.

FINRA has also identified customer identification issues with respect to DVP/RVP accounts.  These accounts meet the definition of an account for customer identification purposes (CIP) and, absent a formal reliance agreement with the prime broker, the executing broker is responsible for implementing CIP for these customers.

1. Specialization – Specialization and centralization of high-risk matters appears to be the growing trend at FINRA as evidenced by the creation of specialized teams in AML, municipal bonds, and most recently recidivist brokers.  In addition to routine FINRA audits, select firms may be subject to stand-alone, targeted examinations by one of these specialized teams.  These focused examinations are typically prompted by regulatory tips or FINRA’s internal surveillance identifying brokers, customers, product types, and/or geographic locations in which your firm conducts business as higher risk.
2. Surveillance –Similar to its National Surveillance Program, FINRA’s AML team will allocate resources to surveillance to assist in the identification of higher AML risk financial institutions.  By closely working with clearing and introducing firms and through enhanced data analytics, FINRA surveillance will identify firms that pose greater AML risk.

Where Will Your Focus Be?

Ultimately, FINRA and the SEC’s National Examination Program priorities are not exhaustive.  With unique risks, issues, and policies, the important thing is that your firm uses these priorities letters to give your firm regulatory perspective on perceived areas of risk and to help strengthen your compliance and supervisory programs.