The Financial Industry Regulatory Authority is making enforcement of markup and markdown disclosure a priority for 2020, in the wake of a year-end report that many firms were violating requirements under FINRA and Municipal Securities Rulemaking Board rules.
In a 2020 Risk Monitoring and Examinations Priorities letter released Thursday, FINRA said it planned to focus on fixed income markup and markdown disclosures among other areas. The letter highlights areas of focus throughout the entire industry in its risk monitoring, surveillance and examination programs.
“FINRA continues to identify new ways to provide firms with information they can use to assess and strengthen their compliance, supervisory and risk management programs,” said Robert Cook, FINRA CEO and president. “To that end, this year’s priorities letter includes a list of practical considerations and questions that firms may use in evaluating these programs.”
In a
FINRA found firms excluding charges from markup and markdown disclosure such as firms disclosing charges separately, even when those charges reflected the firm’s compensation. They also found firms had unclear or inaccurate labels for registered representatives’ sales credits or concessions, among other issues.
FINRA had also said it would review any changes in firms’ behavior that might be undertaken to avoid their markup and markdown disclosure obligations.
FINRA also has an eye on Regulation Best Interest, which is set to go into effect June 30, 2020. In the first part of this year, FINRA plans to review firms’ preparedness for Reg BI to understand implementation challenges firms may face. After June, FINRA will examine firms’ compliance with the rule.
“FINRA staff expects to work with SEC staff to ensure consistency in examining broker-dealers and their associated persons for compliance with Reg BI and Form CRS,” FINRA said in its letter.
RegBI is a rule that would strengthen the broker-dealer standard of conduct beyond existing suitability obligations and make it clear that a broker-dealer may not put its financial interests ahead of the interests of a retail investor. It will also require both broker-dealers and investment advisers to state clearly key facts about their relationships with their customers, including financial incentives. As part of RegBI, broker dealers have to provide Form CRS, a brief relationship summary to retail investors.
The MSRB plans to file amendments to Rule G-19 on suitability and Rule G-20 on gifts and gratuities very soon to reflect RegBI.
This year, FINRA will be looking to see if dealer firms that engage in fixed income trading have established controls in line with their best execution obligations. FINRA will focus on whether firms use reasonable diligence to determine whether customer order flow is directed to the best market given the size and type of orders, among other factors.
Cybersecurity risks will also be a focus in 2020. Firms should expect to be thoroughly assessed on whether their policies and procedures are reasonably designed to protect customer records and information, FINRA said.
“FINRA recognizes that there is no one-size-fits-all approach to cybersecurity, but expects firms to implement controls appropriate to their business model and scale of operations,” FINRA said.
