Financial Advisors

Takeaways from FINRA Small Firm Conference: October 2019

Intersource Consulting Group recently attended FINRA’s Small Firm Conference at the end of October in Los Angeles for the third straight year.  This year FINRA unveiled some new changes to its operations and stressed some key regulatory best practices that expect to have lasting implications over the next few years:

  • FINRA has revealed new Broker-Dealer Firm Groupings. Over the years, member broker-dealers have not always agreed with the Groupings assigned to them (institutional, retail, market maker, etc.).  While such a grouping might have reflected one part of their business, it may have not effectively characterized their overall business to customers and the market.

So FINRA has established these Broker-Dealer Firm Groupings, to each include (but not limited to) the following:

Retail:

  • Retail Trading
  • Private Placements for Individuals only
  • FinTech

Capital Markets and Investment Banking:

  • Public Finance
  • Mergers & Acquisitions
  • Private Placements for Institutions and Individuals

Trading and Execution:

  • ATS and ECN firms
  • Institutional Trading
  • Proprietary Trading
  • Market Making

Clearing and Carrying Firms:

  • to also include 15a-6 firms

Diversified:

  • to include firms that fall into other areas of the securities industry
  • FINRA held a panel session (including industry professionals) specifically addressing SEC Regulation BI (Customer “Best Interest”) which goes into full effect on June 30, 2020. One requirement under Reg BI is the broker-dealer’s need to provide the Form CRS (“Customer/Client Relationship Summary”) to all retail customers by June 30, 2020.  The CRS is 2 pages for broker-dealers and 4 pages for investment advisers, and explains in greater detail what securities, risk, amounts, etc. are appropriate for an investing customer.    
  • FINRA held an AML (“Anti-Money Laundering”) session (also including industry professionals), in which the themes centered around:
  • Not to delegate AML responsibilities (compliance or testing) to mid-level or below employees. A lot of broker-dealers try to take those approaches to minimize cost, but AML is too important to take that risk. Higher-level principals should be responsible for day-to-day AML compliance, and independent outside consultants should be retained for the annual testing of the AML program.
  • A lot of broker-dealers (particularly the smaller ones) develop the mindset that money laundering is typically targeted toward larger firms with bigger accounts and larger wallets. The reality is that money launderers also target smaller firms with perceived weaker controls and protocols. One speaker said that AML, and related AML regulatory violations, can destroy a broker-dealer. All broker-dealers, including small ones, should ensure that AML compliance is always at the top of their priorities.
  • Broker-dealers should have a grasp on the internal and external movements of funds on a daily basis, utilizing effective reporting. When money laundering takes place, a firm needs to gather the information as quickly as possible.  Some firms use a monthly funds movement report – very problematic if for example the October report is available November 1 and shows that funds were laundered way back on October 1.  That is going to be a difficult situation to resolve.
  • FINRA is instituting a 6-month gap between the end of a broker-dealer’s Firm Exam (previously called Cycle Exam) and the beginning of the next Firm Exam. This is significant when a broker-dealer is on an annual Firm Exam cycle.  Some firms had been experiencing situations where the 2019 exam was starting, but the 2018 exam had not yet been completed/closed-out, etc.  However, if significant customer harm or regulatory transgressions are perceived by FINRA to be occurring at a member firm, FINRA reserves the right to conduct Firm Exams whenever it wishes, not observing any gaps, 6-month or otherwise.
  • FINRA is changing the Recommendations section in its Examination Reports to the Observations section. Firms in the past had felt some pressure from Recommendations, with the thought that FINRA wanted or expected the firm to enact such suggestions.  The Observations section offers the firm some insight as to what FINRA saw that was notable, but that did not violate any rules.  This way the firm can be on the lookout for something, think about how differently to handle a process, etc.  The overall goal on FINRA’s part is for an Observation to not ultimately turn into a problem. 
  • FINRA continues to ask whether broker-dealers are adequately and effectively testing their Supervisory Controls, Policies, and Procedures on an annual basis. And the key word here is testing – Are firms testing their procedures as memorialized?  Some firms don’t take the steps to amend procedures when necessary while testing. 

If you’re a Broker-Dealer or Investment Advisory Firm that has Compliance Needs (CCO, FINOP, Principal, AML, Membership, etc.), give Intersource Consulting Group a call at (631)721-3541, (978)335-7015 or visit www.intersourcecg.com/team/

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.