On February 9, 2022, the Financial Industry Regulatory Authority (FINRA) released its “2022 Report on FINRA’s Examination and Risk Monitoring Program.” For each topic, the report identifies the applicable rules and highlights key considerations for member institutions’ compliance programs. It additionally summarizes findings from the most recent examination process and provides guidance that may be helpful to member firms in reviewing their supervisory procedures and controls to enable them to fulfil their compliance obligations. In a press release accompanying the report, Greg Ruppert, FINRA’s Executive VP for Member Supervision stated, “Today’s securities industry landscape is highly dynamic in terms of business models, technologies, products, and compliance practices, and this report looks at these significant changes through the lens of FINRA’s commitment to investor protection and market integrity so that firms’ compliance programs can benefit from our findings about emerging and ongoing issues.”
What this means
The report covers multiple risks across the financial services industry, many of which have “made the hit parade” for over 20 years. In 2022, however, FINRA has also focused on several categories where public attention has been more focused in recent years, including the rise of the retail investor stemming from the “stock short squeeze” at the beginning of 2021, and its continued fallout.
- Mobile Apps and Digital Platforms
Advances in technology continue to reshape the way firms attract and interact with customers. These innovations may benefit investors by increasing their market participation and expanding the types of products available. However, these platforms may also encourage retail investors to engage in trading activities that are not consistent with either their investment goals or risk tolerance. These technologies also raise concerns regarding the appropriate fiduciary duty of care given to retail investors, in that these investors may utilize multiple firms (member and non-member) for information gathering and trading. FINRA identified significant problems with the supervision of activity on some apps, and the use of social media to acquire customers raising potential data privacy issues. Simply put, the “gamification” of retail trading on digital platforms and mobile apps continues to be a focus of FINRA and U.S. financial regulators more broadly
In 2022, FINRA plans to issue a regulatory notice on the sale of crypto assets by or through any FINRA member firm, particularly with regard to advertising and disclosure requirements.
Cybersecurity threats continue to be one of the primary risks faced by the financial industry. Indeed, in 2021, FINRA observed increases in the number and sophistication of these threats. FINRA has issued regulatory guidance concerning the rise of bad actors using compromised email accounts to gain unauthorized entry to customer accounts, including online brokerage accounts, in order to move money and gain access to sensitive information. This is in conjunction with other alerts calling for heightened awareness of cyber threats related to the geopolitical conflict in Ukraine. Starting in 2022, FINRA plans to share with member firms, where applicable, information on emerging cybersecurity.
- Restricted Firms
On January 1, 2022, FINRA rolled-out a high-risk firm regime (Rule 4111), which is intended to manage risks posed by broker dealers with a significant history of misconduct and firms with a high concentration of individuals with a similar history. FINRA will be issuing a proposal to disclose for public information the status of restricted firms on BrokerCheck, a free tool from FINRA to research the professional backgrounds of brokers and brokerage firms, as well as investment adviser firms and advisers.
- Regulation Best Interest (Reg BI)
2021 was the first full calendar year of Reg BI implementation. Over the past year, FINRA has expanded the scope of its reviews and testing to execute a more comprehensive review of firms’ processes, practices, and conduct in areas such as establishing and enforcing adequate written supervisory procedures related to Reg BI. FINRA specifically focused on Reg BI’s “Care Obligation,” which requires broker-dealers and registered representatives to “exercise reasonable diligence, care, and skill” in making recommendations to customers, in order to identify and mitigate conflicts of interest and provide effective training to staff.
“A lot of exciting initiatives” are afoot at FINRA in 2022, FINRA CEO Robert Cook said on January 19, 2022. “Front and center and the core of our mission is investor protection and market integrity,” Cook added at a Securities Industry and Financial Markets Association (SIFMA) webinar. “A theme of a lot of what we’ll be doing this year is going to be around retail investor protection issues, particularly in light of the surge in retail investors that we’ve seen coming into the markets in recent years.”
In the coming weeks, the U.S. Securities and Exchange Commission’s 2022 Examination Priorities will also be released. Similar to FINRA’s report, the SEC will highlight its current regulatory priorities and the key risks and trends the agency has observed as part of its effort to improve compliance and protect investors. For a discussion with FINRA and SEC leaders on their 2022 Examination and Enforcement Priorities, please register now for our March 28 panel: Register Now: 2022 SEC and FINRA Examination and Enforcement Priorities.
- FINRA 2022 exam report highlights Reg BI compliance, AML trends, more | Article | Compliance Week
- FINRA to Prioritize Cryptocurrency, Options Account Paperwork, and Expungement Reform in 2022 – Lexology
- FINRA’S 2022 Report on Examination & Risk Monitoring Program | Burr & Forman – JDSupra
- 8 Top FINRA Priorities for 2022 | ThinkAdvisor
- 2022 Report on FINRA’s Examination and Risk Monitoring Program | FINRA.org
- BrokerCheck – Find a broker, investment or financial advisor (finra.org)
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