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FINRA Issues Annual Guidance Regarding Compliance Programs

FINRA Issues Annual Guidance Regarding Compliance Programs

On February 9, 2022, FINRA published the eagerly awaited 2022 Report on FINRA’s Examination and Risk Monitoring Program (the “Report”). The purpose of the Report is to provide firms with information concerning recent examination findings, outline effective practices observed by FINRA during their exams and generally highlight key considerations for firms’ compliance programs. At a high level, the four areas of focus of the Report include Firm Operations, Communications & Sales, Market Integrity and Financial Management. These areas are consistent with the prior year’s Report, but FINRA has included some new topics within each of those general areas for 2022 as well as reiterated certain topics from 2021. 

Highlighted topics from the 2022 Report include the focus on significant regulations recently implemented, such as Regulation Best Interest and Consolidated Audit Trail. Particular attention is being paid to the written supervisory procedures to address the requirements as well as the supervisory control processes implemented by firms to address the obligations. Best execution is a perennial area of interest, and this year’s Report also has a specific topic covering the disclosure of order routing information requirement under SEC Rule 606.  With the changes to Rule 606 having been in effect for over a year now, FINRA noted areas of deficiency ranging from inaccurate reporting and incomplete disclosures to insufficient supervisory procedures and processes to monitor the reporting.  Other highlighted areas covered in the Report include firms’ regulatory obligations in executing SPAC transactions, communications/disclosures made to customers with respect to complex products and cybersecurity.

Additional topics that FINRA reiterated in 2022 included compliance with anti-money laundering requirements as well as the SEC’s Market Access Rule (15c3-5).  On the AML side, the Report spotlighted an emerging low-priced securities risk that FINRA has observed which is possibly indicative of fraudulent schemes conducted via omnibus accounts opened in the U.S. by foreign financial institutions.  FINRA identified a number of activities to monitor. These include trading that coincides with increases in share price/volume without any news, and deposits of large blocks of shares that originate from convertible debt that are immediately sold.  With respect to Market Access, FINRA noted insufficient controls around pre-trade order limits and capital thresholds as well as firms’ inability to demonstrate the reasonability of assigned capital/credit thresholds.  FINRA also cited firms’ reliance on vendors without performing adequate due diligence and understanding how the vendor controls operate to comply with requirements.

ViP: The Validus platform maintains numerous procedures for monitoring aberrant trading activity which could be indicative of fraud across multiple asset classes, including low-priced securities.  Firms may provide a specific list of securities to be monitored based upon their business or utilize existing reference tables within Validus.  In addition to surveillance procedures, Validus also provides a comprehensive offering of risk checks covering order limits (shares/value), aggregate capital/credit limits, duplicate orders, etc., which serve as an effective post-trade control on the pre-trade limits resident in firms’ vendor trading systems.  Such checks provide a valuable tool for firms to demonstrate ongoing due diligence of vendor-based controls.  


About Eventus Systems

Eventus Systems is a leading global provider of multi-asset class trade surveillance and market risk solutions. Its powerful, award-winning Validus platform is easy to deploy, customize and operate across equities, options, futures, foreign exchange (FX), fixed income and digital asset markets. Validus is proven in the most complex, high-volume and real-time environments of tier-1 banks, broker-dealers, futures commission merchants (FCMs), proprietary trading groups, market centers, buy-side institutions, energy and commodity trading firms, and regulators. The company’s rapidly growing client base relies on Validus and Eventus’ responsive support and product development teams to overcome its most pressing regulatory challenges. For more, visit www.eventus.com.