Year after year, the Financial Industry Regulatory Authority (FINRA) releases its annual exam report, highlighting critical areas of risk to investors and the markets, providing insight into findings from recent examinations of FINRA registered firms. On Jan. 10, 2023, this year’s FINRA Exam Report was released and included a total of 24 topic areas, four of which, were new this year.
Highlights from the 2023 FINRA Exam Report: Reg BI, Form CRS, cybersecurity and more
While not a review of the entire report, this list covers some of the key risk areas noted within the 2023 FINRA Exam Report, which FINRA registered financial firms should take into consideration when assessing their own ongoing compliance program.
1.Consolidated Audit Trail (CAT)
FINRA continues to evaluate member firms which receive or originate orders in NMS stocks, OTC equity securities and listed options for compliance with the Securities Exchange Act of 1934.
2. Order Handling, Best Execution and Conflicts of Interest
FINRA continues to assess member firms’ compliance with best execution obligations, including whether firms are fully and promptly executing marketable customer orders, adequately conducting periodic “regular and rigorous reviews” and clearly and completely disclosing the specific terms of any profit-sharing relationships.
3. Mobile apps
FINRA has observed potential issues with some mobile apps not adequately distinguishing between products and services of the broker-dealer and those of affiliates or third parties.
Cybersecurity continues to be a focus area. FINRA has increased its outreach to member firms this year to make them aware of cyber threats.
5. Complex products and options
FINRA will continue to review member firms’ communications and disclosure made to customers in relation to complex products.
6. Reg BI and Form CRS
Reg BI and Form CRS became effective on June 30, 2020, and FINRA has been examining member firms’ implementation of related obligations throughout 2021 and 2022. Findings as a result of those examinations include:
- Recommending a series of transactions which were excessive in light of retail customers’ investment profiles.
- Not maintaining profile information for retail customers, undermining the firm’s ability to demonstrate compliance with the Care obligation.
- Failing to conduct a reasonable investigation of offerings prior to recommending them to retail customers.
- Not identifying conflicts and disclosing or, if necessary, eliminating conflicts of interest associated with recommendations of securities transactions or investment strategies.
- Not identifying and mitigating potential conflicts regarding revenue or fee sharing arrangements with fund managers for offerings that were recommended to retail customers.
- Not providing retail customers with “full and fair” disclosure of all material facts related to the scope and terms of their relationship with these retail customers.
- Failing to adopt and implement written policies and procedures which are reasonable designed to achieve compliance with Reg BI.
- Deficient Form CRS Filings:
- Exceeding prescribed page lengths.
- Omitting material facts.
- Failing to describe types of compensation.
- Failing to properly deliver Form CRS.
- Failing to adequately amend Form CRS.
The 2023 FINRA Exam Report highlights the scope and depth of risk within the financial landscape, placing the responsibility on advisers to continuously act in the best interest of their clients, to reduce and mitigate risk at every point possible. Such responsibility, especially for firms which lack the support of a large regulatory compliance department, can cause significant challenges. The answer? Bringing in an outside expert. NRS Compliance Consultants are experts in their field, with decades of experience navigating the FINRA exams and regulations to help support financial firms and ensure ongoing compliance. Schedule a demo to see how we can help you prepare for 2023 FINRA exams and regulatory activity.