Report Reflects New and Evolving Risks, Industry Trends, and Noteworthy Findings

FINRA published today its 2023 Report on FINRA’s Examination and Risk Monitoring Program to provide member firms with key insights and observations to use in strengthening their compliance programs.

The comprehensive report from FINRA’s regulatory operations covers 24 topics — including four new topics — relevant to the evolving securities industry.

“This report represents a holistic approach to FINRA regulation, leveraging information from across our regulatory operations to provide member firms with information to help them enhance their core compliance programs,” said Greg Ruppert, Executive Vice President, Member Supervision at FINRA. “The report addresses topics that remain perennially important, with updates to reflect evolving risks, industry trends and findings from FINRA’s recent oversight activities. This year, we have also increased the breadth of the report’s coverage by adding several new topics focused on insights originating in our market surveillance activities.”

New Topics Covered in the Report:

• Manipulative Trading. The report’s findings include inadequate written supervisory procedures, non-specific surveillance thresholds and surveillance deficiencies.
• Fixed Income – Fair Pricing. Among the findings are incorrect determination of prevailing market price, outdated mark-up/mark-down grids, failure to consider the impact of mark-up on yield to maturity and unreasonable supervision.
• Fractional Shares. Reporting failures and inadequate supervisory systems and procedures are among the findings.
• Regulation SHO. This section includes findings on non-bona fide market making and impermissible reuse of locates.

Additionally, the report introduces a new Financial Crimes section, consisting of three topics — Cybersecurity and Technological Governance; Anti-Money Laundering, Fraud and Sanctions; and Manipulative Trading. This highlights FINRA’s increased focus on protecting investors and safeguarding market integrity against these ongoing threats.

Other Key Topics Include:

• Cybersecurity. Cybersecurity threats continue to be one of the most significant risks facing many customers and firms. The frequency, sophistication and variety of attacks continue to increase. The report discusses FINRA’s significant focus on cybersecurity, including the establishment of the Cyber and Analytics Unit to enhance the ability to proactively address the increasingly sophisticated cyber threat landscape, the impact of cyber-enabled fraud activity including on investors in the crypto-asset market, and FINRA’s increased outreach to firms to make them aware of cybersecurity threats.
• Complex Products. As discussed in the report, FINRA will continue to review firms’ communications and disclosures to customers relating to complex products. FINRA will also review customer account activity to assess whether firms’ recommendations regarding these products are in the best interest of retail customers given their investment profiles and the potential risks, rewards and costs associated with the recommendations.
• Regulation Best Interest (Reg BI) and Form CRS. To provide firms with more information regarding these regulations, the report sets forth updated observations of FINRA’s review of firms’ compliance with Reg BI and Form CRS. These include observations relating to firms’ identifying and addressing conflicts of interest; disclosing to retail customers all material facts related to conflicts of interest; establishing and enforcing adequate written supervisory procedures; and filing, delivering and tracking an accurate Form CRS.
• Mobile Apps. As the use of mobile apps becomes increasingly widespread, the risks posed by them become more significant. The report discusses FINRA’s observations of potential issues with some mobile apps, including apps that do not adequately distinguish between products and services of the broker-dealer and those of affiliates or third parties (such as transactions involving crypto assets). It also touches on mobile apps’ disclosures and explanations of higher-risk products or services, such as certain options and margin lending activities.

Each topic in the report outlines regulatory obligations, considerations, findings and observations from recent oversight activities, effective practices and additional resources. New material is emphasized in bold.

A podcast about the report — featuring Ornella Bergeron, Senior Vice President, Member Supervision; Michael Solomon, Senior Vice President, Examinations; and Bill St. Louis, Executive Vice President, National Cause and Financial Crimes Detection Program — is available on FINRA’s website. In addition, the subjects covered in the report will be featured in other FINRA-related compliance and education resources released throughout the year, including at our 2023 Annual Conference taking place from May 16-18, 2023 in Washington DC.

About FINRA

FINRA is a not-for-profit organization dedicated to investor protection and market integrity. It regulates one critical part of the securities industry—brokerage firms doing business with the public in the United States. FINRA, overseen by the SEC, writes rules, examines for and enforces compliance with FINRA rules and federal securities laws, registers broker-dealer personnel and offers them education and training, and informs the investing public. In addition, FINRA provides surveillance and other regulatory services for equities and options markets, as well as trade reporting and other industry utilities. FINRA also administers a dispute resolution forum for investors and brokerage firms and their registered employees. For more information, visit www.finra.org.

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