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  • FINRA releases 2018 Regulatory and Examinations Priorities Letter

    Securities

    On January 8, the Financial Industry Regulatory Authority (FINRA) published its Annual Regulatory and Examination Priorities Letter (2018 Letter), which focused on several broad issues within the securities industry, including improving the examination program to “implement a risk-based framework designed to better align examination resources to the risk profile of [] member firms.” As previously covered in InfoBytes, last July FINRA360 (a comprehensive self-evaluation and organizational improvement initiative) prompted the organization to announce plans currently underway to enhance operations by consolidating its existing enforcement teams into a single unit. In the 2018 Letter, FINRA announced ongoing efforts to work with member firms to understand the risks and benefits of fintech innovation such as blockchain technology, as well as the impact initial coin offerings (ICOs) and digital currencies have on broker-dealers.

    Additional areas of regulatory and examination focus for FINRA in 2018 will include: (i) fraudulent activities and suspicious activity report filing requirements; (ii) business continuity planning; (iii) protection and verification of customer assets, including whether firms have implemented adequate controls and supervision methods along with measuring the effectiveness of cybersecurity programs; (iv) anti-money laundering monitoring and surveillance resources and policies and procedures; and (v) the role firms and other registered representatives play when effecting transactions in cryptocurrencies and ICOs—specifically with regard to the supervisory, compliance and operational infrastructure firms implement to “ensure compliance with relevant federal securities laws and regulations and FINRA rules.”

    Securities Fintech FINRA Examination Fraud Privacy/Cyber Risk & Data Security Anti-Money Laundering Initial Coin Offerings Virtual Currency SARs Blockchain Financial Crimes

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  • FINRA Fines Brokerage Firm $2.8 Million for Customer Protection Rule Violations

    Securities

    On December 27, the Financial Industry Regulatory Authority (FINRA) announced that it fined a New York-based brokerage firm $2.8 million based on allegations that the firm violated the SEC’s Customer Protection Rule and due to other related supervisory failures. According to the Letter of Acceptance, Waiver, and Consent (AWC), from March 2008 to June 2016, the firm did not have reasonable processes in place to ensure that its control systems were operating properly.  As a result of these design flaws, the firm failed to properly segregate customers’ foreign and domestic securities in appropriate control locations, leading to deficits in securities valued at hundreds of millions of dollars.” The firm neither admitted nor denied the findings set forth in the AWC agreement.

    Securities FINRA Enforcement SEC

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  • FINRA Provides Additional Guidance on AML Obligations

    Financial Crimes

    On November 21, the Financial Industry Regulatory Authority (FINRA) published additional guidance regarding member firms’ obligations under FINRA Rule 3310, which requires adoption of an anti-money laundering (AML) program. The guidance provided in Regulatory Notice 17-40 follows the Financial Crime Enforcement Network’s (FinCEN) 2016 adoption of a final rule on customer due diligence requirements for financial institutions (CDD Rule). Under the CDD Rule, member firms must now comply with a “fifth pillar,” which requires them to “identify and verify the identity of the beneficial owners of all legal entity customers” at the time when a new account is opened, subject to certain exclusions and exemptions. Additionally, the “fifth pillar” requires member firms to understand the nature and purpose of customer relationships, conduct ongoing monitoring to report suspicious activities and transactions, and maintain and update customer information “on a risk basis.”

    The “fifth pillar” supplements the previously established Bank Secrecy Act AML program requirements, coined the “four pillars,” which require member firms to (i) establish policies and procedures to “achieve compliance”; (ii) conduct independent compliance testing; (iii) designate responsible individuals to implement and monitor AML compliance; and (iv) provide ongoing training.

    The CDD Rule became effective on July 11, 2016, and member firms must comply by May 11, 2018. FINRA advises members firms to consult the CDD Rule, along with FinCEN's related FAQs, to ensure AML program compliance.

    Financial Crimes FinCEN FINRA Anti-Money Laundering Bank Secrecy Act

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  • SEC Approves FINRA’s Streamlined Securities Competency Exams for Industry Professionals and Consolidated Registration Rules

    Securities

    On October 5, the Financial Industry Regulatory Authority (FINRA) announced SEC approval of its proposal to consolidate certain registration rules and streamline competency exams for professionals entering or re-entering the securities industry. Under Regulatory Notice 17-30, the NASD and NYSE incorporated registration rules are now consolidated as “FINRA rules” to provide member firms “consistency and uniformity.” The rules will allow member firms to permissively register all associated persons of a firm and establish waiver programs for registered employees who “move to a financial services industry affiliate of a member firm.” Further, as previously discussed in an InfoBytes post concerning the proposed rule, FINRA’s new streamlined examination structure is designed to eliminate duplicative testing and remove outdated categories. The changes include a general knowledge examination that all new representative-level applicants will be required to pass, in addition to a revised qualification examination appropriate to their job functions. Changes to FINRA’s continuing education requirements have also been made. The rule takes effect October 1, 2018.

    Securities FINRA SEC

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  • SEC Issues Regulatory Notice Approving Amendments to FINRA Arbitration Proceedings

    Securities

    Earlier this month, the SEC released Regulatory Notice 17-25 approving amendments to FINRA customer and industry arbitration procedures, which will impact Rules 1240212403, and 13403. The changes will require the Director of FINRA’s Office of Dispute Resolution to make lists of arbitrators available to all parties at the same time “within approximately 30 days after the last answer is due.” Party agreements to extend answer due dates will no longer have any bearing on when the arbitrator list is provided. The amendments will affect cases filed on or after September 18, 2017.

    Securities Agency Rule-Making & Guidance FINRA Arbitration

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  • FINRA to Host AML Seminars

    Agency Rule-Making & Guidance

    On August 2, the Financial Industry Regulatory Authority (FINRA) announced that it will host a series of anti-money laundering (AML) seminars for compliance professionals, led by managers of the FINRA AML Unit. The seminars on October 19 (Dallas, Texas), November 7 (Boca Raton, Florida), and November 13 (New York, NY) will discuss money laundering fundamentals and typologies, applicable rules and regulations, and guidelines for monitoring for suspicious activity.

    Agency Rule-Making & Guidance FINRA Compliance Anti-Money Laundering

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  • FINRA Announces Head of Enforcement, Consolidates Enforcement Functions into Single Department

    Securities

    On July 26, the Financial Industry Regulatory Authority (FINRA) announced the promotion of Susan Schroeder to Executive Vice President and Head of Enforcement. Previously, Ms. Schroeder served as FINRA Senior Vice President and Deputy Chief of Enforcement, and she began serving as acting Head of Enforcement around the start of this year. Schroeder will report directly to CEO Robert Cook. FINRA also announced plans to consolidate its existing enforcement teams—“one handling disciplinary actions related to trading-based matters found through Market Regulation’s surveillance and examination programs, and the other handling cases referred from other regulatory oversight divisions including Member Regulation, Corporate Financing, the Office of Fraud Detection and Market Intelligence, and Advertising Regulation”—into a single unit led by Schroeder. This reorganization was prompted by FINRA360, the organization’s comprehensive self-evaluation and improvement examination.

    Securities FINRA Enforcement

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  • FINRA Fines Financial Firms $2.4 Million for Improper Customer Records Storage

    Securities

    On July 5, the Financial Industry Regulatory Authority (FINRA) announced that several investment firms agreed to pay fines totaling $2.4 million for allegedly failing to maintain customer records in an electronic format that cannot be altered or destroyed. The firms all signed FINRA’s letters of Acceptance, Waiver, and Consent (AWC) containing allegations and proposed settlement terms for the alleged violations. See agreements here, here, and here.

    In the agreements, FINRA emphasizes that financial firms are storing more and more sensitive customer data. FINRA asserts that broker-dealer electronic records must be complete and accurate to assist FINRA and other regulators in examinations and to ensure that member firms can conduct audits. Increasingly aggressive hacking attempts also enhance the need for firms to keep these records in the required format. According to the allegations in the agreements, the firms violated Section 17(a) of the Exchange Act of 1934 (the "Exchange Act"), NASD Rule 3110 and FINRA Rule 4511 by not maintaining electronic brokerage records in non-erasable and nonrewritable format, known as “WORM” format. The electronic records contained information about millions of securities transactions, millions of customer account records, numerous financial records, and records regarding anti-money laundering compliance.

    FINRA also asserts that the firms: (i) failed to give 90-day advance notice to FINRA before storing records electronically; (ii) failed to set up audit systems for retaining records electronically; (iii) failed to obtain attestation letters from vendors agreeing to provide all firm records to regulators, if needed; and (iv) failed to set up and enforce written procedures to ensure electronically stored records were retained in compliance with FINRA and federal securities laws.

    In addition to monetary sanctions, the firms agreed to review and update policies and procedures to ensure compliance with FINRA and federal securities laws. Additionally, the firms must submit remediation plans to FINRA for approval.

    Securities Privacy/Cyber Risk & Data Security FINRA Enforcement Settlement Investment Adviser

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  • FINRA Announces Fintech Outreach Initiative, Hosts Blockchain Symposium in July

    Fintech

    On June 13, the Financial Industry Regulatory Authority (FINRA) announced a new outreach initiative to improve its understanding of fintech innovations and how they impact the securities industry. The Innovation Outreach Initiative will consist of the following components:

    • the launch of FINRA’s new webpage dedicated to fintech topics such as RegTech (covering compliance monitoring, fraud prevention, data management, and the identification and interpretation of regulations affecting the securities industry), artificial intelligence, and social media sentiment investing; and
    • the creation of a cross-departmental team led by the Office of Emerging Regulatory Issues developed to, among other things, foster discussion on fintech developments, develop publications on fintech topics, and increase collaboration with domestic and international regulators.

    Additionally, FINRA announced it will host a Blockchain Symposium in New York City on July 13 to create an opportunity for regulators and industry leaders to join together and discuss opportunities and challenges related to the use of Distributed Ledger Technology, also known as blockchain.

    Fintech Securities FINRA SEC Blockchain Distributed Ledger Virtual Currency

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  • FINRA Releases New Guidance on Rules Concerning Digital Communications

    Privacy, Cyber Risk & Data Security

    On April 25, FINRA issued new guidance on the application of its rules governing communications with the public concerning social media networking sites and online business communications. In 2010 and 2011, FINRA released Regulatory Notices 10-06 and 11-39 to provide initial guidance on these specific rules, and in 2013, “adopted amendments to Rule 2010 that codif[ied] guidance provided in the Notices with respect to the supervision of interactive social media posts by member firms.” In December 2014, FINRA issued its Respective Rule Review Report, which was designed to “assess whether the communications rules are meeting their intended investor protection objectives . . . and to take steps to maintain or improve the effectiveness of the rules.” FINRA Regulatory Notice 17-18 is the response to the report’s request for additional guidance and provides examples of how FINRA applies its rules to the following topics: text messaging, personal communications, hyperlinks and content sharing, native advertising, online testimonials and endorsements, correction of third-party content, and BrokerCheck. FINRA further notes that Regulatory Notice 17-18 is intended to deliver further guidance and does not alter principles previously provided in prior notices.

    Privacy/Cyber Risk & Data Security FINRA Agency Rule-Making & Guidance Securities

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