These are the highlights and selected observations from FINRA’s all exams conducted in 2017.
The Top 4 Issues Highlighted from FINRA’s Report
- Cybersecurity –
This area continues to evolve. The underlying basis for this requirement is Regulation S-P. The most common problems cited were phishing, “spear phishing,” ransomware and fraudulent third-party wires. “Spear phishing” differs from regular “phishing” in that it targets an individual or set of individuals apparently known by the attacker.
- Suitability –
The most problematic products cited in the report were multi-share class and complex products, unit investment trusts (“UITs”) and inverse exchange traded funds (“ETFs”). Particular problems were early rollovers and exchanges of UITs and failure to have a reasonable basis for recommending a particular share class
- Anti-Money Laundering (“AML”);
A canned set of AML procedures is unlikely to cut it with FINRA. Rather, the AML procedures should be tailored to the firm’s specific business model. This should at minimum cover: (i) trading; (ii) the flow of funds; and (iii) customer identification information. Finally, is the broker-dealer in compliance with FINRA Rule 3310 (c) independent testing of AML monitoring?
- Best Execution of Trades –
Are the “best execution” reviews, adequate, rigorous and regular? Likewise, are they documented? This goes beyond stocks to cover fixed income and equity options too. This requirement applies to orders that are executed, handled received and routed by the broker-dealer. This best execution review, under FINRA Rule 5310, must be done at least quarterly. The review should look at different order type’s likelihood of execution, speed thereof and price improvement.