SEC & FINRA Announce Annual Exam Priorities for 2015

2/17/2015

Each January, the Financial Industry Regulatory Authority (“FINRA”) and the Securities & Exchange Commission (“SEC”) publish their regulatory and exam priorities for the calendar year.[1] Obviously, they are valuable when preparing for an exam or in connection with on-going self-assessments. Just as valuable, however, is the insight they provide into the current regulatory perspective of the industry as a whole.

In this year’s letter, FINRA highlighted what it characterized as “recurring challenges” in five particular areas, observing that those challenges consistently play roles in compliance and supervisory failures. At the center of them all, according to FINRA, is the failure to place the client’s interest first. They also point to conflicts of interest, firm culture, supervision, risk management and controls, and certain products and service offerings. Each of these deserve some consideration when evaluating your own policies and procedures. Consider whether they may foster some of the concerns identified and what may be done now to minimize or eliminate the potential for a compliance failure.

Priorities for 2015

Many of the specific matters that will draw regulatory attention this year are ones that have gotten plenty of attention in the past: due diligence, suitability, supervision, compensation arrangements, asset valuation, cybersecurity and anti-money laundering. Certain products, like variable annuities, non-traded REITs and private placements, will also remain in the cross-hairs.

In addition however, FINRA and the SEC will both focus on products with unique risk profiles – specifically, products that pose risks not readily apparent to investors or even the representatives selling them. (They point to interest rate sensitive products, structured products, alternative mutual funds, floating-rate bank loan funds, and exchange traded products tracking alternative weighted indices as examples.)

The regulators believe that the complexity of these (and similar) products may obscure the actual risk associated with them. And so, for that reason, they will be looking to ensure that firms have conducted adequate due diligence in connection with them, trained their personnel effectively and properly disclosed to investors, the nature and scope of the risks they pose.

In addition to specific products, regulators will be scrutinizing how firms treat certain opportunities related to “wealth events,” like IRA rollovers, inheritances, settlements, etc. Regulators will be looking to see if recommendations are the result of a comparison of various alternatives. That comparison should include a thorough analysis of the features they offer, fees, and associated expenses. This is an area often susceptible to conflicts of interest – one of the “recurring challenges” FINRA indicates leads to compliance breakdowns. For this reason, we would expect fairly critical analysis of the way firms undertake to prevent them.

Advancing the Cause with Better Tools

Identification of regulatory problems continues to evolve with the aid of technology. Regulators are now able to mine the substantial amount of transaction data they collect to flag things like possible excessive trading, microcap fraud, and other suspicious activity. FINRA has announced that it intends to combine its analytical capabilities with specifically targeted examinations to reduce the threat posed by high risk and recidivist representatives and branch offices. Those individuals can expect “rigorous regulatory attention.” So too, can the firms hiring them. FINRA will be reviewing the sufficiency of the due diligence conducted by those firms prior to hiring reps in this category. Regulators will also be expecting to see written supervision plans tailored to ameliorate the specific risks these individuals pose to investors.

Create Your Action Plan

Anticipation of a potential exam is not the only reason to give attention to the annual regulatory and examination priorities letters. They also provide valuable insight that could help guide your firm’s longer term decisions. Either way, now is a good time to review the regulators’ plans and incorporate them into your own firm’s initiatives for 2015.

[1] FINRA 2015 Regulatory and Examination Priorities Letter (January 6, 2015); SEC Examination Priorities for 2015 (January 13, 2015).

For more information, please contact George at 813-347-5102 or gguerra@wiandlaw.com or Dionne at 813.347.5118 or dfajardo@wiandlaw.com.