FINRA’s Report has been changed this year to incorporate information from two reports that had previously been issued separately, these being the report that had summarized findings, and the report highlighting areas expected to be examined in the coming year. The 2021 Report therefore is a longer and more inclusive release; each topic section contains, if applicable, a brief description of Regulatory Obligations, Related Considerations (questions that FINRA might ask when examining a firm), Exam Findings, Effective Practices, and Additional Resources. The Report lists newer findings from recent examinations, older findings from past years, and emerging topics
FINRA recommends that firms use the Report to aid in the consideration of compliance obligations, in the identification of various risks, and in considering relevant practices to incorporate into their own compliance programs.
Highlighted Areas specifically mentioned by FINRA in its Report:
RegBI and Form CRS: FINRA will continue to focus on this Rule, and expand the scope of reviews now that firms have had a chance to implement its requirements. FINRA states that it is still in the early stages of examination, and therefore does not include exam findings or effective practices for this topic. The Report does include an extensive list of Related Considerations that firms should review, as well as a list of Additional Resources that firms can access.
Consolidated Audit Trail (CAT): This recently enacted Rule is still in the early stages of FINRA firm reviews, and findings and effective practices are not available at this time. However, the Report includes a list of recommended steps, considerations, and resources available to firms when assessing their CAT programs.
Cybersecurity: FINRA points out that the remote work environments caused by the pandemic, and the likely continued use of that business model has posed additional risks. FINRA notes various considerations, observations, and effective practices in the Report.
Communication with the Public: FINRA is focused on ongoing developments in communication technology such as app-based platforms or “game-like” features that may improperly influence customers. FINRA will examine how firms are communicating with accounts regarding new products. Supervision of these communications, and related record keeping, are a focus.
Best Execution: FINRA will be examining firms’ practices regarding reviews of execution quality. Firms will be asked whether these reviews are done “order by order” or by a “regular and rigorous” method, and to show documentation and rationale for such methods. Order routing, in general, will be a focus, and FINRA has highlighted that they will be performing a TARGETED REVIEW of firms that do not charge commissions for customer transactions to in order to evaluate the effects of that policy on order routing and other firm business.
Variable Annuities: Exchanges under Rule 2330 will continue to be evaluated. FINRA engaged in an informal review of how firms handle “buyouts”, prompted by a change in a large insurer’s practices impacted a sizable number of customers. Firms are encouraged to consider the effective practices that were identified as part of that review.
Comprehensive List of Topics Included in the Report
The Report is broken down into four sections, each section having several subsections. They are as follows:
Firm Operations, which includes AML, Cybersecurity, Outside Business Activities, Private Transactions, Books and Records, Regulatory Event Reporting, and Fixed Income Mark-up Disclosure.
Communications and Sales, which includes RegBI and Form CRS, Communications with the Public, Private Placements, and Variable Annuities.
Market Integrity, covering CAT, Best Execution, Large Trader Reporting, Market Access, and the Vendor Display Rule.
Financial Management, which includes Net Capital, Liquidity Management, Credit Risk Management, and Segregation of Assets and Customer Protection.
As mentioned above, for each topic and where applicable, the Report includes Regulatory Obligations, Related Considerations, Exam Findings, Effective Practices, and Additional Resources. The Report also includes an appendix designed to help firms use the Report in developing and improving their own compliance programs.
A link to the Report can be found here.