On January 7, 2020 the Securities Exchange Commission’s (“SEC”) Office of Compliance Inspections and Examinations (“OCIE”) announced its examination priorities for 2020, focusing on protecting retail investors and assessing ongoing and emerging market-wide risks. Shortly thereafter, the Financial Industry Regulatory Authority (“FINRA”) released its 2020 Risk Monitoring and Examination Priorities Letter detailing areas of focus for FINRA’s 2020 risk monitoring, surveillance and examination programs. With the start of the new year already upon us, its important to understand the changes in this year’s exam priorities as well as be aware of ongoing initiatives being continued in 2020.
SEC Exam Priorities Summary
The SEC exam priorities letter is published each year to enhance the transparency of the exam program and to provide an understanding of its risk-based approach. This includes potential risks to investors as well as risks to the integrity of the U.S. capital markets. OCIE continues to focus in 2020 on many of the same issues it did in the 2019 priorities, such as critical investor protection and market integrity issues. Additionally, OCIE’s 2020 exam priorities identify key areas of risk, both existing and emerging, that are expected to be identified and mitigated by market participants.
Here is a list of OCIE’s 2020 exam priorities, along with a brief summary of each area:
Retail Investors, Including Seniors and Those Saving for Retirement- Protecting retail investors is a top exam priority. Exams will focus on reviews of disclosures relating to fees, expenses, and conflicts of interests.
Market Infrastructure- OCIE will focus on risk-based exams of clearing agencies and national securities exchanges, with a particular focus on the security and integrity of their systems.
Information Security- This includes a focus on accurate configuration of network storage devices, information security governance, and retail trading information security.
Focus Areas Relating to Investment Advisers, Investment Companies, Broker-Dealers, and Municipal Advisors- Risk-based exams will continue for each type of registered entity, including exams on registered investment advisers (“RIAs”) that have never been examined before. Each registered entity has its own focus area for its risk-based exam.
Anti-Money Laundering (“AML”) Programs- OCIE will continue to review for compliance with appropriate anti-money laundering requirements, including whether entities are adopting required AML programs.
Financial Technology (Fintech) and Innovation, Including Digital Assets and Electronic Investment Advice- OCIE’s exam priorities evolve with new technological trends. OCIE will continue to recognize new advancements in technology as well as identify and examine digital tools used by registered firms.
FINRA and MSRB- OCIE will continue to oversee and examine FINRA and MSRB, focusing on the effectiveness of operations, regulatory programs, procedures, and controls.
FINRA Exam Priorities Summary
FINRA’s 2020 exam priorities letter focuses on FINRA’s risk monitoring, surveillance, and examination programs. Much like the SEC’s exam priorities letter, FINRA’s exam priorities emphasize many of the same issues it did in 2019 while also addressing new and emerging priorities for 2020. FINRA also includes a list of practical considerations for each highlighted topic in their exam priorities letter, which will help entities evaluate their own compliance and risk management programs better.
The primary focus areas for FINRA’s 2020 exam priorities include:
Sales Practice and Supervision- FINRA will continue to asses firms’ compliance with sales practice obligations to their customers in areas discussed in this year’s priorities letter as well as areas discussed in previous priorities letters. These areas include complex products, variable annuities, private placements, fixed income mark-up/mark-down disclosures, representatives acting in certain positions of trust or authority, and senior investors. New highlighted areas include communications with the public, the Regulation Best Interest (Reg BI) standard, cash management and bank sweep programs, sales of IPO shares, and trading authorization.
Market Integrity- New areas of focus for market integrity include direct market access controls, best execution obligations, disclosure of order routing information, and the Vendor Display Rule. FINRA will also continue to evaluate firms’ compliance with the ongoing obligations established in previous years’ letters. Additionally, FINRA will continue to work with firms to make sure they complete the Consolidated Audit Trail (“CAT”) in April 2020 as well as devote necessary resources to ensure accurate reporting in their programs.
Financial Management- Digital assets, liquidity management, contractual commitment arising from underwriting activities, and London Interbank Offered Rate (“LIBOR”) transitions are all new focus areas for 2020. In addition, FINRA will continue to evaluate firms’ compliance programs relating to the Customer Protection Rule (Exchange Act Rule 15c3-3) and Net Capital Rule (Exchange Act Rule 15c3-1).
Firm Operations- Cybersecurity and technology governance are both new focus areas for FINRA’s exam priorities in 2020. In addition to these new areas, FINRA will also assess firms’ supervisory controls relating to customer confirmations and anti-money laundering compliance.
In summary, both the SEC’s and FINRA’s exam priorities letters stress a continued emphasis on past initiatives as well as a focus on new and emerging areas. The exam priorities are by no means exhaustive but provide a solid basis for tackling issues of compliance and promoting protection for investors. As we progress through the year, developments in the industry will prompt modifications to expand or adjust each exam priorities letter. Industry participants should refer to the new exam priorities and communicate with counsel to make sure they comply with the new focus areas and how the new priorities may affect their business.
Brian Edstrom is a Shareholder and Attorney at Avisen Legal, P.A. He brings to Avisen clients the ability to “speak regulator,” having spent several years working for federal and state regulators in Washington D.C. and Saint Paul, MN before entering private practice. Brian assists clients in all aspects of working with securities regulators, whether it be to obtain a license or registration, prepare for an audit, or respond to an enforcement investigation. Brian also regularly advises clients on their general business needs, particularly surrounding raising money through securities offerings.
Nico Hanson is a 2L law student at the University of St. Thomas School of Law. As an aspiring attorney, he hopes to one day practice
in areas such as business and commercial law, employment law, nonprofit law,
administrative law, as well as others.