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On January 9, 2020, FINRA released its 2020 Risk Monitoring and Examination Priorities Letter for its member firms. The exam priorities are organized into four categories: (1) sales practice and supervision; (2) market integrity; (3) financial management; and (4) firm operations. Within these groupings are several issues of potential interest, including among others, the following:

  • Regulation Best Interest and Form CRS. FINRA will begin evaluating firms’ compliance with Regulation Best Interest and Form CRS, compliance with both of which is required by June 30, 2020. Examinations conducted before the compliance date will review firms’ preparedness for the new rules while examinations conducted after the compliance date will review for compliance. FINRA noted it will take the following factors into consideration when conducting examinations after the compliance date: (1) whether firms have procedures and training in place to assess recommendations of securities, account types and monitoring using a best interest standard; (2) whether firms and associated persons consider the new elements of care, skill and costs when making recommendations to retail customers; and (3) whether firms have procedures in place to comply with the disclosure and conflict of interest obligations and the filing, updating and delivery of Form CRS.
  • Sales of Initial Public Offering Shares. FINRA will review firms’ compliance with Rule 5130 (Restrictions on the Purchase and Sale of Initial Equity Public Offerings) and Rule 5131 (New Issue Allocations and Distributions). FINRA notes that it may consider whether firms have procedures and controls in place to detect instances of both “flipping” and “spinning” and how firms prevent allocations of new issues to restricted persons.
  • Consolidated Audit Trail (CAT) Reporting. FINRA reminds certain firms that CAT reporting requirements will begin in April 2020. Any broker-dealer that is a member of a national securities exchange or FINRA and receives, originates or handles orders in NMS securities, which includes NMS stocks and listed options, or over-the-counter equity securities, will be subject to this requirement.
  • Best Execution. FINRA is reaffirming the importance of firm compliance with best execution obligations. FINRA will focus on whether firms use reasonable diligence to determine whether customer orders are directed to the best market, given an order’s characteristics. FINRA specifically mentioned it will focus its efforts on routing decisions, odd-lot handling, U.S. Treasury securities and large block executions in options.
  • Digital Assets and Liquidity Management. Regarding digital assets, FINRA is reviewing digital asset activities and focusing on how firms market these activities to outside investors. Regarding liquidity management, FINRA will focus on issues of compliance addressed in Regulatory Notice 15-33.

The 2020 Risk Monitoring and Examination Priorities Letter is available here.



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John S. Marten

Shareholder



Nathaniel Segal

Counsel



David W. Soden

Associate



Jacob C. Tiedt

Shareholder