On March 1, 2010, FINRA issued its 2010 annual examination priorities letter to all FINRA member firms. (pdf). This year’s letter is no different from past years in that it highlights areas that FINRA’s examination program will be focusing on throughout the coming year. These areas include some that we see from year-to-year; e.g., information barriers, variable annuities, protection of customer information and IT/Cyber-Security, anti-money laundering and outsourcing, to name a few. Some of the newly identified areas of focus from the prior year are fraud detection, pandemic preparedness/business continuity planning, accounting and spreadsheet controls and short sales and Regulation SHO compliance.
This year’s letter does bring some changes from past letters. Historically, the letter identified areas of focus of FINRA’s Market Regulation and Member Regulation Departments. This year’s letter also includes topics that are of heightened importance to the Enforcement Department as well. However, the letter does not delineate which are the priorities of the examination programs versus the Enforcement Department.
One of the most significant pronouncements in the letter is regarding firms that are registered as both broker-dealers and investment advisers. FINRA states that it is their longstanding position that “firms must supervise, as private securities transactions, their registered representative’s investment adviser business to the extent that those representatives participate in the execution of a transaction on behalf of their advisory client.” FINRA warns that its examiners may review the investment advisory activities of a dually registered firm or individual to ascertain that the firm is properly supervising those activities to ensure compliance with FINRA rules.
I believe that being able to review the investment advisory activities of a dually registered firm is of particular importance to FINRA. FINRA would like to see the entire picture when it comes to its member firms to ensure that one of its member firms is not able to hide the next big ponzi scheme because those activities occur in the investment adviser side of the dually registered firm.
Also of note, FINRA’s examination priorities are subject to change throughout the year as new issues may arise. This year, there may be even more changes in the priorities with the upcoming departure of two of the signers of the letter, Bob Errico, Executive Vice President, Member Regulation, Sales Practice Regulation, and Susan Merrill, Executive Vice President, Enforcement.