FINRA released its 2018 Regulatory and Examination Priorities Letter (“2018 Letter”) on January 8, 2018. The 2018 Letter highlights areas of emphasis for FINRA in the coming year. While many of the areas of focus are similar to those included in the 2017 Regulatory and Examination Priorities Letter—including continued focus on high-risk brokers, fraud, firms’ surveillance systems, cybersecurity protocols, and protecting vulnerable investors—there are additional topics included in the 2018 Letter based on market developments throughout 2017 and the results of FINRA’s 2017 exam program, summarized in the 2017 Report on FINRA Examination Findings.
In the 2018 Letter, FINRA President and CEO Robert W. Cook framed FINRA’s priorities for the upcoming year as bringing “both continuity and change in FINRA’s programs.” FINRA will continue its “unwavering commitment to . . . protecting investors and promoting market integrity in a manner that facilitates vibrant capital markets.” In addition to identifying new priorities, the 2018 Letter thus also discusses implementing operational changes identified during the FINRA360 retrospective review designed to enhance FINRA’s efficiency and effectiveness in achieving these core objectives.
The 2018 Letter highlights three new substantive areas of emphasis for 2018. First, FINRA will focus on “technology governance,” including firms’ controls for implementation of technological changes that may have significant effects on handling of customer orders and market integrity. FINRA is also, like other financial regulators—including the Securities and Exchange Commission (“SEC”)—focusing its attention on cryptocurrencies and initial coin offerings (“ICOs”). FINRA will closely monitor developments in this area and review the supervisory and compliance mechanisms that firms have in place to “ensure compliance with relevant federal securities laws and regulations and FINRA rules.” (The Cleary FinTech Update provides further information, resources and insight in this area.) Finally, FINRA recognized that events such as Hurricanes Harvey and Maria “underscore the need for firms to maintain written Business Continuity Plans (“BCPs”) that address continued access to critical systems” during periods where physical access is limited. In the coming year, FINRA will be paying special attention to firms’ BCPs to ensure that they adequately enable firms to meet their existing obligations to customers in emergency situations.
Together, these priorities demonstrate the importance to FINRA of firms’ operational integrity and recognize the key role of broker-dealers in maintaining the stability of the financial markets and as gatekeepers to those markets for investors. As continued technological advancements impact the securities markets, broker-dealers’ processes and controls for accessing and trading in those markets will become increasingly important, and regulatory scrutiny over those processes is likely to continue, including through both regulatory change and focus by examiners and enforcement staff. Moreover, with respect to ICOs and cryptocurrencies, FINRA is not alone in focusing on these emerging issues and risks for investors—recently, the North American Securities Administrators Association released an investor reminder regarding the risks associated with these products, which the SEC supported shortly thereafter (for more on this topic, see here).
The other changes highlighted in the 2018 Letter are operational and include consolidation of FINRA’s enforcement function into a single department and the implementation of a “risk-based framework designed to better align examination resources to the risk profile” of member firms. Additionally, FINRA plans to enhance transparency in the coming year by, among other things, increasing its information sharing with firms during its investigations and improving the process for making examination information requests. The 2018 Letter also discusses FINRA’s commitment to work with member firms—in its parlance, to “better leverage [its] SRO model by utilizing the expertise and experience of [its] members”—to keep abreast of developments in financial technologies and the effects these developments have on investors and markets. By effectively using these resources, firms may be able to proactively identify areas for improvement and thereby avoid costly enforcement proceedings down the road.