The 2022 Report is Worthy Reading for Every Compliance Officer
If you are in the broker-dealer industry, reading the 2022 Report on FINRA’s Examination and Risk Monitoring Program is worth your time and attention – especially if you are a supervisory principal or other compliance officer. FINRA not only highlights key issues in the industry, but also effective and ineffective practices to, as FINRA requires in Rule 3110, “establish and maintain a system to supervise the activities of each associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable FINRA rules.” A few observations came to mind.
FINRA starts the substantive portion of the Report with “Firm Operations” issues. In that, FINRA begins with those concerning anti-money laundering (AML) and cybersecurity and technology governance. FINRA shows a clear interest that its members do not conduct business with the wrong persons. If you are an industry participant, then make sure that your relevant systems are appropriately audited. To the extent that you have delegated duties to vendors, make sure that you review their SOC audits as well. You will recall that just last year, FINRA reminded members of their obligations to supervise their vendors in Regulatory Notice 21-29.
FINRA also highlights the role of written supervisory procedures (WSPs) in several topics, and in particular, how deficient WSPs can impact a compliance program. Having reviewed members’ WSPs during my time at FINRA – and drafted a number of policy suites as well – I appreciate FINRA’s guidance. WSPs should be specific and tailored to a member’s business. They should not be aspirational or simply restatements of the applicable regulatory standards.
Finally, FINRA outlines various findings and effective practices for surveilling a member’s reporting to the Consolidated Audit Trail (CAT). The considerations outlined in 21-29 again come into play as many members rely on another entity to report their data to the CAT. It is not enough to simply to review CAT report cards. FINRA encourages member firms to compare the data in their reporting to the CAT to their order records. I know that this is no small task having reviewed a CAT report or two in my time.
Again, I encourage industry participants to give this a read. Please contact me if you have any questions about the Report or any other issue involving FINRA.
Thank you for reading this post. Please know that I wrote it for informational purposes only (some may consider it ADVERTISING MATERIAL) and did not intend for it to be legal advice or to form an attorney-client relationship with you – especially in jurisdictions where I am not licensed to practice law. I encourage you to seek your own counsel to help you with your specific situation. To that end, I invite you to contact me if you would like to discuss my services.
Ryan Smith is a partner of Practus, LLP and based in the Washington, D.C. area. His practice focuses on helping broker-dealers, registered investment advisers and their associates address a wide range of legal and compliance issues.