Last week FINRA released its “Report on FINRA Examination Findings” (the “Report”) that covered commonly found deficiencies in its examination of broker-dealers. Since FINRA examines its members at least once every four years, it’s database of violations is much larger than the SEC’s. Many violation types named in the Report are also relevant for SEC registered investment advisers or dual registrants since they include general regulatory requirements.
Here, we summarize those violations cited in the Report that crossover to the broader universe of firms, including investment advisers and dual registrants.
Crossover areas and associated findings include:
- Cybersecurity – lack of or weak system access controls, risk assessments, vendor management, segregation of duties, and data loss prevention management.
- Outside Business Activities – failure of reps/employees to notify firm of OBAs, insufficient review of OBA reporting, failure to supervise and monitor existing approved OBAs.
- Best Execution – failure to review the quality of executions, failure to review orders by risk type, failure to include specific criteria in reviews such as speed of execution, price improvement and likelihood of execution.
- Alternative Investments – incorrect account statements resulting from assets held away and not accounted for properly.
- Regulation SHO – order management systems that could not account for open sell orders in relation to Rule 200(g), lack of proprietary order information, inadequate trading reports for testing purposes, inability to perform locate obligations for controls on “easy or hard to borrow” securities, lack of written procedures for Rule 204 of Reg SHO regarding closeout of fails to deliver.
Firms with multiple affiliated entities should take note of these findings if the related firms span the regulatory universe of both registered broker-dealers and investment advisers. Since many dual registrants share compliance programs and resources, the Report’s findings should be given scrutiny from both the ’40 Act and FINRA rule perspectives.
View “Report on FINRA Examination Findings,” December 2017