PHOENIX - The Financial Industry Regulatory Authority will focus on fraud, best execution, and suitability requirements among other things in 2018, according to its annual regulatory and exam priorities letter.
The letter, released earlier this week, contains a laundry list of topics that also includes alternative trading systems, data integrity, and market manipulation.
Some of these topics are also on the Municipal Securities Rulemaking Board's radar in connection with the protection of retail investors. In addition, the Securities and Exchange Commission's newly created Fixed Income Market Structure Advisory Committee is expected to discuss liquidity of the bond markets and may touch on some of these issues at its first meeting on Thursday.
FINRA is responsible for enforcing rules implemented by the Securities and Exchange Commission and the self-regulatory organizations such as the MSRB.
While many of its priorities reflect continuity from year to year, the 2018 letter states, FINRA is in the process of modernizing and improving its approach.
“Last year, we embarked on FINRA360, a comprehensive self-evaluation and organizational improvement initiative,” FINRA said. “We have been engaging with our member firms and the many other stakeholders in FINRA’s success to identify how we can strengthen our operations while becoming more efficient. We have already made a number of significant enhancements to our operations, and we will continue to implement more changes in the coming year.”
Among the changes underway is the implementation of a “risk-based” examination framework, FINRA said, designed to “better align examination resources to the risk profile of our member firms.”
The topics are significant because they reflect a number of concerns among rulemakers. SEC chairman Jay Clayton has repeatedly expressed concerns about whether retail “main street” investors, a huge chunk of the fixed-income market, are adequately protected.
The MSRB’s Rule G-18 on best execution, which took effect in 2016, requires dealers to seek the most favorable terms reasonably available for their retail customers’ transactions. A report on examination findings released by FINRA last month cited concerns in compliance with FINRA’s own best execution rule, particularly with the steps firms were taking to ensure compliance.
“FINRA found that some firms failed to implement and conduct an adequate regular and rigorous review of the quality of the executions of their customers’ orders,” the self-regulator said. “ FINRA notes that conducting a regular and rigorous review of customer execution quality is critical to the supervision of best execution practices, particularly if a firm routes customer orders to an alternative trading system in which the firm has a financial interest or market centers that provide order routing inducements, such as payment for order flow arrangements and order routing rebates.”
Suitability requirements, in much the same vein, are designed to ensure that firms are making recommendations that make sense for their customers.
FINRA dinged Minneapolis-based Ameriprise $45,000 late last year in part for failing to observe suitability requirements in selling securities marketed only to qualified institutional buyers to customers who were not QIBs.
FINRA said the annual letter is designed as a “point of reference” for firms as they develop and revise their compliance, supervisory and risk management programs and prepare for FINRA examinations. The organization may adjust its priorities as circumstances change, said FINRA.