On October 16, the Financial Industry Regulatory Authority (FINRA) published its 2019 Report on Examination Findings and Observations (Report). Unlike previous years, the Report delineates between examination “findings” and examination “observations.” “Findings” describe violations of a rule or regulation, whereas “observations” refer to suggestions regarding how firms can improve controls and mitigate risk. The annual Report summarizes various findings and observations from recent examinations of its member firms on a range of topics, including the following:
- Supervision: some firms failed to adequately update their written supervisory procedures to address new or amended rules in addition to the inadequate supervision of specific accounts, accounts statements and internal inspections.
- Suitability: some firms lacked adequate systems of supervision to ensure that financial recommendations were suitable in light of a customer’s individual investment profile factors.
- Digital Communication: some firms encountered challenges complying with supervision and recordkeeping requirements for digital communication.
- Anti-Money Laundering (AML): FINRA flagged inadequate AML transaction monitoring and overreliance on clearing firms as issues.
- Uniform Transfers to Minors Act (UTMA) and Uniform Grants to Minors Act (UGMA) Accounts: some firms failed to implement effective practices to verify the authority of custodians when the account beneficiary reaches majority age.
- Cybersecurity: FINRA highlighted that effective cybersecurity practices include branch controls, documented policies on vendor and third-party management, and incident response planning.
- Business Continuity Plans (BCPs): the BCPs of some firms did not reflect certain market conditions, business models or other circumstances.
- Fixed Income Mark-up Disclosure: FINRA noted exam findings related to disclosures, unclear or inaccurate labels for sales credit, incorrect Prevailing Market Price determinations and inaccurate time of execution.
- Best Execution: FINRA identified issues with some firms’ execution quality reviews, as well as conflicts of interest and related disclosures.
FINRA also highlighted issues regarding direct market access controls, short sales, liquidity and credit risk management controls, segregation of client assets and net capital calculations.
For complete coverage of the topics covered in the Report, the full version is available here.