FINRA Announces 2015 Regulatory Priorities

On Jan. 6, 2015, the Financial Industry Regulatory Authority (“FINRA”) released its 2015 Regulatory and Examination Priorities letter highlighting risks and issues FINRA believes could adversely affect investors and market integrity. The 15-page letter to broker-dealers outlines a number of areas FINRA examiners will focus on as part of their inspections this year, from sales practices around complex securities to firms’ approaches to cybersecurity risk management to the use of abusive trading algorithms.

This year’s letter opens by highlighting five areas in which it has seen recurring challenges or shortcomings in broker-dealer activity:

• Alignment of firms’ interests with those of their customers;
• Standards of ethical behavior;
• Development of strong supervisory and risk management systems;
• Development, marketing, and sale of novel products and services; and
• Management of conflicts of interest.

These challenges cut across and can affect many of the areas of focus described in the letter.

FINRA’s areas of focus for 2015 cover a broad spectrum. Some are product-focused concerns, for example the sale of interest rate-sensitive fixed income securities and floating-rate bank loan funds. Another area of focus will be high-risk and recidivist brokers, who can cause outsized risk to investors. FINRA is also seeking to protect the growing population of senior investors, noting that “[t]he consequences of unsuitable investment advice can be particularly severe for this investor group since they rarely can replenish investment portfolios with fresh funds and lack time to make up losses.”

Cybersecurity is becoming an area of focus for FINRA as it has for public and private companies across the globe. FINRA examiners will now “review firms’ approaches to cybersecurity risk management, including their governance structures and processes for conducting risk assessments and addressing the output of those assessments.” In early 2015, FINRA expects to publish the results of a 2014 sweep investigating the types of threats to which member firms are subject.

Another specific problem area already subject to FINRA sweeps launched in July 2014 are brokerages’ order-routing practices. Early reviews of routing decisions “show that some firms do not have active best execution committees or other supervisory structures in place to meet their obligation to regularly and rigorously evaluate the quality of customer order executions.”

For more information, you can find FINRA’s 2015 Regulatory and Examination Priorities letter here.