The Financial Industry Regulatory Authority this week issued a letter that details its regulation and examination priorities for the New Year.

In the advisory, FINRA addresses topics related to business conduct, fraud, financial and operational concerns, and market regulation priorities. “We encourage firms to use this guidance along with their own analysis to enhance their programs as we will be examining for strong controls and robust compliance efforts in these areas," said Susan Axelrod, FINRA's executive vice president of regulatory operations, in a statement.

Recidivist Brokers

FINRA will continue to look closely at brokers with a pattern of complaints or disclosures for sales practice abuses.

Early last year, FINRA launched a High Risk Broker initiative to expedite investigations. In 2014, it will expand the program and create a dedicated enforcement team to prosecute these cases.

When a firm hires high-risk brokers, examiners will review the firm's due diligence conducted in the hiring process and assess the adequacy of supervision for them (including whether the brokers are under heightened supervision).

Suitability of Investments

FINRA details concerns about the suitability of recommendations to retail investors for complex products that may be difficult to understand. These concerns are magnified, it says, when there is a strong incentive to recommend a product because of its fee or compensation structure. Examinations in 2014 will focus on how material risks are disclosed to investors and the training given to retail-facing brokers to ensure they also understand the products.

Conflicts of Interest

Examiners will evaluate firms' conflicts management practices. Reviews will look at approaches for new product reviews and identifying potential conflicts those products raise. Examiners may look at whether wealth management businesses make independent decisions about the products they offer without pressure to favor proprietary products or those with revenue-sharing agreements.

Cybersecurity

FINRA will continue to focus is the integrity of firms' policies, procedures, and controls to protect sensitive customer data.

Initial Public Offering Market

For firms engaged in the public underwriting business, FINRA will review due diligence activities, monitor the completeness and accuracy of filings, and review compliance with rules concerning the sales and allocations of IPO securities. FINRA will also examine firms' private placement activity to ascertain whether they reasonably validate that investors meet accredited investor standards.

Crowdfunding Portals

FINRA will implement a targeted regulatory program for crowdfunding portals (created by the JOBS Act and mandated rulemaking) that begin registering with it this year.

Insider Trading

FINRA advises that firms should routinely review electronic communications within business units that may come into possession of material, non-public information, such as investment banking and research departments. Firms should maintain appropriate information-barrier policies and procedures designed to keep material, non-public information on a “need-to- know” basis. FINRA also expects firms to monitor employee trading activity, both inside and outside the firm, to identify suspicious activity. Employee training will be assessed.

Liquidity Risk

In 2014, FINRA examinations will require larger firms to perform a liquidity stress. Examiners will expect firms to maintain adequate liquid capital cushions to weather counterparty credit risk exposures in the event that a material counterparty experiences financial distress or a liquidity squeeze.

Risk Control

Firms that hold more than $1 million in aggregate customer credits or $20 million in capital, including subordinated debt, will be required to document their credit, market and liquidity risk management controls. This is the first time larger broker-dealers will be required to document risk controls.

Accounting

Firms will be expected to review their books and records to ensure they have the proper expertise needed to maintain them accurately and in accordance with U.S. Generally Accepted Accounting Principles. FINRA has also observed, a recent report the Public Company Accounting Oversight Board noted, a lack of independence by auditors of small broker-dealers.

Trading Systems

FINRA will continue to review testing and controls related to high-frequency trading and other algorithmic trading strategies. Firms should be prepared to address how they conduct pre-implementation testing and whether legal, compliance and operations staff review the design and development of trading systems.

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