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1/7/16 - FINRA’s Regulatory and Examination Priorities for 2016

The Financial Industry Regulatory Authority on Jan. 5 released its “2016 Regulatory and Examination Priorities Letter,” which identified three broad themes of regulatory concern: culture, conflicts of interest, and ethics; supervision, risk management, and controls; and liquidity. FINRA’s letter also highlighted more specific areas it will monitor closely: excessive concentrations in the recommendation and sale of investment products, protections for seniors and vulnerable investors, private placements and Regulation A+ offerings, several aspects of the market for fixed-income securities, market integrity, financial and operational controls, anti-money-laundering compliance, cybersecurity, and data quality.

Culture, Conflict of Interest, and Ethics

FINRA said it will conduct assessments of individual firms’ culture, which the letter said has a profound influence on how they conduct business and manage conflicts of interest. The self-regulatory organization’s assessments of firm culture will pay particular attention to how it affects the firm’s compliance and risk management. These examinations will consider five indicators:

  • Whether the organization values control functions
  • Whether it tolerates policy or control breaches
  • Whether it actively seeks to identify risk and compliance events
  • Whether firm supervisors are effective role models of firm culture
  • Whether subcultures exist that may not conform to overall corporate culture, and whether they are identified and effectively addressed

The SRO will aggregate this information to develop firm evaluations and determine the level of regulatory resources it devotes to a particular firm.

Supervision, Risk Management, and Controls

FINRA will continue to review firms’ supervisory structures and systems to ensure they are reasonably designed and comply with securities laws and regulations and FINRA rules. The SRO will focus on four areas of historical regulatory concern: the management of conflicts of interest, technology, outsourcing, and AML compliance.

The SRO will look for potential conflicts of interest by reviewing incentive structures, the independence of investment banking and research, information leakage, and position valuations.

FINRA will also assess firms’ technology programs, reviewing their cybersecurity preparedness, management of technology systems, data governance, quality controls, and reporting practices.

The outsourcing reviews will focus on the due diligence firms perform on third-party service providers, as well as on firms’ ongoing supervision of the outsourced activity. FINRA reminded firms that they must not outsource functions that only qualified registered individuals can perform.

FINRA’s AML assessments will continue to focus on suspicious-activity monitoring and microcap securities. The SRO said it will review firms’ surveillance of money movements and trading activity for possible suspicious activity. FINRA will test firms’ surveillance systems to ensure they are reasonably designed and properly detect potential suspicious activity. The SRO will also assess how firms perform due diligence on microcap securities to ensure compliance with federal securities laws.


The SRO will continue to review how firms manage their liquidity risk. It will assess the adequacy of their contingency funding plans and compare them against their business models. FINRA’s letter refers to Regulatory Notice 15-33 for effective practices, such as the evaluation of liquidity needs during marketwide and idiosyncratic stresses, development of contingency plans, and performance of stress tests.

How Promontory Can Help

Promontory helps regulated entities, including broker-dealers, understand their compliance obligations. Please call us to discuss how brokerage firms can review their compliance programs in light of FINRA’s 2016 priorities letter. For more information, please contact:

Conway Dodge
Managing Director, Washington, D.C.
+1 202 370 0461

Michael Sullivan
Director, Washington, D.C.
+1 202 370 0507

Jacob Lesser
Director, Washington, D.C.
+1 202 370 0397