Securities Arbitration Lawyers BlogFINRA Releases Focus for 2016; Emphasis on Securities Firms’ Culture, Supervision, and Liquidity
On January 5, 2016, the Financial Industry Regulatory Authority (FINRA) released its 2016 Regulatory Examination Priorities letter highlighting three broad issues affecting investors and their rights: culture, conflicts of interest and ethics; supervision, risk management and controls; and liquidity. The letter also emphasizes sales practice, financial and operational controls, market integrity, and the significant role each of these plays in the way a securities firm conducts its business.
The overarching themes cited by FINRA are as follow:
Culture, Conflicts of Interest and Ethics – FINRA will formalize its assessment of firm culture to better understand how it impacts compliance and risk management and complete the review begun in 2015 regarding incentives and conflicts of interest in connection with firms’ retail brokerage business. FINRA will specifically assess five indicators of a firm’s culture:
- Whether control functions are valued within the organization;
- Whether policy or control breaches are tolerated;
- Whether the organization proactively seeks to identify risk and compliance events;
- Whether immediate managers are effective role models of firm culture; and
- Whether sub-cultures that may not conform to overall corporate culture are identified and addressed.
Supervision, Risk Management and Controls – FINRA examinations will emphasize anti-money laundering, cybersecurity, the management of conflicts of interest and technology management, as well as outsourcing and data quality.
Liquidity – FINRA will review the adequacy of firms’ contingency funding plans in light of their business model and market-wide and idiosyncratic stresses, developing solid contingency plans to weather those stresses. FINRA will also evaluate high-frequency-trading firms’ liquidity planning and controls.
Other areas of priority in 2016 include:
- Firms’ monitoring of excessive concentrations and recommendations, particularly regarding complex, speculative or illiquid products;
- Seniors and vulnerable investors;
- Private placements and Regulation A+ offerings;
- Fixed-income securities, including excessive charges;
- Market integrity, including the Vendor Display Rule, market access, fixed-income order handling, Regulation SHO, and manipulation across markets and products; and
- Financial and operational controls relating to exchange-traded funds and fixed-income prime brokerage.
FINRA Chairman and CEO Richard Ketchum notes the issues that continue to hamper securities firms and, consequently, hurt investors over the years.
“Nearly a decade after the financial crisis, some firms continue to experience systemic breakdowns manifested through significant violations due to poor cultures of compliance,” said Ketchum. “In 2016, FINRA will be looking for firms to focus on their culture and whether [they] are putting customers first.”
As evidenced by this letter as well as 2015’s letter noting the same issues, these are systemic issues that remain a work in progress. All the issues discussed continue to negatively affect investors and can potentially lead to legally actionable violations.
Unfortunately, these types of risks continue to manifest themselves in retail brokerage accounts where we have seen dramatic growth in sales practice violations relating to alternate proprietary investment products. In 2015, our law firm has handled multiple claims relating to over-concentrated positions in risky alternatives which frequently attempt to use leverage to bolster returns.
In one FINRA arbitration claim on behalf of a senior investor, the allegations track FINRA’s concerns about excessive charges in fixed-income securities where a major wire house is accused of trading over $100 million of municipal bonds resulting in massive losses for themselves.
Silver Law Group represents the interest of investors who have been the victims of investment fraud. If you have questions about your legal rights, please contact Scott Silver of the Silver Law Group for a free consultation at ssilver@silverlaw.com or toll free at (800) 975-4345.