FINRA 2023 Report on Exam and Risk Monitoring Program
FINRA has published its 2023 Report on FINRA’s Examination and Risk Monitoring Program to provide insights from FINRA’s oversight programs to member firms. The FINRA release states the following: https://www.finra.org/media-center/newsreleases/2023/finra-publishes-2023-report-exam-and-risk-monitoring-program
New Topics Covered in the Report:
Manipulative Trading. The report’s findings include inadequate written supervisory procedures, non-specific surveillance thresholds and surveillance deficiencies.
Fixed Income – Fair Pricing. Among the findings are incorrect determination of prevailing market price, outdated mark-up/mark-down grids, failure to consider the impact of mark-up on yield to maturity and unreasonable supervision.
Fractional Shares. Reporting failures and inadequate supervisory systems and procedures are among the findings.
Regulation SHO. This section includes findings on non-bona fide market making and impermissible reuse of locates.
Additionally, the report introduces a new Financial Crimes section, consisting of three topics — Cybersecurity and Technological Governance; Anti-Money Laundering, Fraud and Sanctions; and Manipulative Trading. This highlights FINRA’s increased focus on protecting investors and safeguarding market integrity against these ongoing threats.
Other Key Topics Include:
Cybersecurity. Cybersecurity threats continue to be one of the most significant risks facing many customers and firms. The frequency, sophistication and variety of attacks continue to increase. The report discusses FINRA’s significant focus on cybersecurity, including the establishment of the Cyber and Analytics Unit to enhance the ability to proactively address the increasingly sophisticated cyber threat landscape, the impact of cyber-enabled fraud activity including on investors in the crypto-asset market, and FINRA’s increased outreach to firms to make them aware of cybersecurity threats.
Complex Products. As discussed in the report, FINRA will continue to review firms’ communications and disclosures to customers relating to complex products. FINRA will also review customer account activity to assess whether firms’ recommendations regarding these products are in the best interest of retail customers given their investment profiles and the potential risks, rewards and costs associated with the recommendations.
Regulation Best Interest (Reg BI) and Form CRS. To provide firms with more information regarding these regulations, the report sets forth updated observations of FINRA’s review of firms’ compliance with Reg BI and Form CRS. These include observations relating to firms’ identifying and addressing conflicts of interest; disclosing to retail customers all material facts related to conflicts of interest; establishing and enforcing adequate written supervisory procedures; and filing, delivering and tracking an accurate Form CRS.
Mobile Apps. As the use of mobile apps becomes increasingly widespread, the risks posed by them become more significant. The report discusses FINRA’s observations of potential issues with some mobile apps, including apps that do not adequately distinguish between products and services of the broker-dealer and those of affiliates or third parties (such as transactions involving crypto assets). It also touches on mobile apps’ disclosures and explanations of higher-risk products or services, such as certain options and margin lending activities.
