SEC & FINRA 2020 Examination Priorities: Summary and Comparison - Deloitte
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SEC & FINRA 2020 Examination Priorities: Summary and Comparison
Overlap of 2020 examination priorities
A review of the 2020 US Securities and Exchange Commission’s (SEC) Office of Compliance Inspections and Examinations
(OCIE) priorities letter and the FINRA (Financial Industry Regulatory Authority) risk monitoring and examination priorities
letter shows four overlapping priorities
FINRA Exam SEC Exam
New Priorities
Overlapping Exam New Priorities
Priorities
• Regulation Best Interest (Reg BI) and Form CRS • Fraud, Sales Practice, and Conflicts
• Communication with the Public • Retail-Targeted Investments
• Cash Management and Bank Sweep Programs Regulation Best • Standards of Care
Interest & Form CRS
• Sale of Initial Public Offering (IPO) Shares • Information Security
After June 30, 2020, examinations will
• Trading Authorization focus on firms’ policies and procedures • Digital Assets
surrounding Reg BI and Form CRS
• Direct Market Access Controls • Electronic Investment Advice
• Best Execution Digital Cyber- • Registered Investment Advisers (RIA) Compliance
Assets Security Programs
• Disclosures of Order Routing Information
With a growing Firms should adopt • RIAs to Private Funds
• Vendor Display Rule
digital market, focus reasonably
• Trading and Broker-dealer Risk Management
• Digital Assets will be on those designed policies
firms engaged in and procedures to • Anti-Money Laundering (AML) Programs
• Liquidity Management digit asset protect customer
• Contract Commitment Arising From Underwriting transactions, and records and Recurring Priorities
their established information
• London Interbank Offered Rate (LIBOR) Transition controls and • Never-Before and Not Recently-Examined RIAs
procedures Best Execution
• Cybersecurity • Mutual Funds and Exchange-Traded Funds (ETFs)
• Technology Governance Examinations will focus on conflicts and risk • Broker-Dealer Financial Responsibility
management frameworks for trading
Recurring Priorities activities, including; routing, algorithmic • Municipal Advisors
• Best Execution trading, odd-lot handling, • Clearing Agencies
treasuries and options
• Cybersecurity • National Securities Exchanges
• Business Continuity Plan • Regulation Systems Compliance & Integrity
• Digital Communication • Transfer Agents
Copyright © 2020 Deloitte Development LLC. All rights reserved. 2FINRA Examination
Summary of 2020 exam priorities
3Sales practice and supervision (1 of 2)
Topic Background Focus
During the first half of year, FINRA will focus on preparedness for
Reg BI, Form CRS, and SEC guidance and interpretations. When
Regulation Best In 2019, the SEC adopted Reg BI changing the standard of care
reviewing for compliance with Reg BI after June 30, 2020, FINRA
Interest and applicable to broker-dealers and requiring the delivery of a brief
may factor the following obligations: Care, Compliance, Conflict,
Form CRS customer relationship summary—Form CRS—to retail investors.
and Disclosure. Greater information on the four obligations can
be found on page 1 here.
Focus will be on FINRA Rule 2210 as well as FINRA Rule
3110(b)(4), 4510 and SEC Rules 17a-3 and 17a-4. Two
additional areas of focus will be Private Placement Retail
FINRA continues to review compliance with communication with
Communication Communications and Communications via digital channels. Retail
the public as well as related supervisory and recordkeeping
with the Public communication will focus on the distribution of private placement
requirements.
information via online and traditional channels. Digital channels
which include text, social media, etc. Focus will be around the
review and retention of communication via these platforms.
FINRA’s focus is around cash management systems that sweep
investor cash into firms’ affiliated or partner banks or money
market funds. Although beneficial to the customer, there is a
With the increased presence of cash management services, there high level of concern with various FINRA and SEC Rules.
Cash Management and are additional concerns with FINRA and SEC rules specifically
Bank Sweep Programs around FINRA Rules 1017, 2010, 2210, and SEC Rules 15c3-1 When reviewing Bank Sweep Programs, FINRA will consider,
and 15c3-3. amongst other things, the communication to customers, any
omitted or misrepresented information, disclosures and
documentation to customers, and risks of participation
within the program.
Copyright © 2020 Deloitte Development LLC. All rights reserved. 4Sales practice and supervision (2 of 2)
Topic Background Focus
Focus will be on firms’ obligations under FINRA Rule 5130 and
Sales of In response to the growth of the IPO market in 2019, FINRA 5131. Additionally, various factors will be considered when
IPO Shares plans to assess firms’ IPO practices. reviewing IPO Practices which include: controls, procedures,
reporting, etc.
This will focus on adequacy of supervisory systems around
FINRA plans to assess whether firms maintain procedures and trading authorizations, discretionary accounts and key
Trading
controls around supervisory systems related to trading transaction descriptors. Also, registered representatives
Authorization
authorizations. exercising discretion without written authorization from the client
will also be reviewed.
Copyright © 2020 Deloitte Development LLC. All rights reserved. 5Market integrity
Topic Background Focus
FINRAs focus around SEC Rule 15c3-5 and the potential risks to
financial condition of firms, the integrity of trading on the
With the growth of high-speed trading, FINRA plans to assess
Direct Market securities markets and the stability of the financial system.
Market Access Rule compliance and ensure appropriate controls
Access Control Specifically, when reviewing controls, focus will be on firm
are incorporated to mitigate key risks.
adjustments to credit limits, training, automated controls,
control used by highly automated firms, etc.
FINRA will review how firms manage the conflict of interest that
exist between their duty of best execution and their own
Best FINRA will reassure that firms remain compliant with best financial interest. Additionally, FINRA will review the
Execution execution practices and obligations. reasonableness of firms’ policies and procedures for best
execution and fair pricing for US Treasury Securities and ensure
best execution practices are being executed for option orders.
Amended Rule 606 requires broker-dealers to provide new The focus of FINRAs review will be to ensure that there is
Disclosure of Order
customer-specific reports for not held orders in National Market transparency between the US securities markets and routing
Routing Information
System stocks. practices for both retail and institutional customers.
Rule 603 of Regulation National Market System (NMS) requires a
Emphasis will be around firms’ controls and supervisory systems consolidated display of market data for NMS stocks. Focus will be
Vendor
to ensure National Best Bid or Offer (NBBO) are being around controls related to systems or platforms, firm monitoring
Display Rule
consolidated. of quotes, availability of quotation information, and review of
quotation information.
Copyright © 2020 Deloitte Development LLC. All rights reserved. 6Financial management
Topic Background Focus
FINRA will continue to work the SEC to understand firms’
business plans regarding digital assets and the self clearing and
Based upon the increase of firms seeking to engage in business
settlement of these assets. There will be an increased focus
Digital around digital assets, there is an increased focus on New
around the filing of NMAs and CMAs for the proposed activity.
Assets Member Applications (NMAs) and Continuing Member
Additionally, an emphasis will be on the review of controls and
Applications (CMAs).
procedures which includes marketing materials and retail
communication.
FINRAs focus will be around Regulatory Notice 15-33 and
challenges that arise from clearing and carry firms’ contingency
FINRA will continue to review liquidity management practices as
Liquidity funding plans. Review around best practices will take into
they are a critical control and should be documented in books
Management consideration how stress conditions are addressed, the quality of
and records.
the collateral, and how operational risks are managed for Fixed
Income Clearing Corporations (FICC).
Contractual FINRA will focus on firms’ compliance around understanding the
FINRA will review compliance over net capital requirements over
Commitment Arising nature of the underwriting activity, recordkeeping of contractual
open contractual commitments specifically from underwriting
from Underwriting commitment charges, documentation of relevant requirements,
activity.
Activities and tracking of underwriting net capital.
FINRAs focus will be around firms’ LIBOR related financial
London Interbank FINRA will review how firms are preparing for LIBOR retirement products, how firms are transitioning out of LIBOR linked
Offered Rate Transition at the end of 2021. financial products, and how LIBOR phase-out will impact
customers.
Copyright © 2020 Deloitte Development LLC. All rights reserved. 7Firm operations
Topic Background Focus
Policies around cybersecurity remain of high importance to FINRA focus will be around firms implementing controls
Cybersecurity ensure that customer records and information and reasonably appropriate to their business model to protect customer
protected. information consistent with Regulation S-P.
FINRA’s focus is around the increase use of technology for many
customer facing activities and the potential impact this may have
to FINRA Rules 4370, 3110, and 4511 as well as Exchange Act
FINRA plans to assess whether firms maintain procedures and
Technology Rules 17a-3 and 17a-4. Key aspects FINRA may focus on
controls around supervisory systems related to trading
Governance regarding firms technology governance programs include but are
authorizations.
not limited to: impacts to Business Continuity Plans, controls to
report key issues, and testing performed prior to changes being
made in a production environment.
Copyright © 2020 Deloitte Development LLC. All rights reserved. 8SEC Examination
Summary of 2020 exam priorities
9Retail investors
Topic Background Focus
There are concerns with continued regulatory disclosures to Focus will be on recommendations and advice given to retail
retail investors, which includes fees and expenses and conflicts customers with specific emphasis on seniors, teachers and
Fraud, Sales Practice,
of interest. Firms must ensure that controls and systems are in military personnel. Additional focus will be on high risk products,
and Conflicts
place regarding disclosure requirements and the fulfillment of RIA fiduciary capacity, and fee and compensation based conflicts
those disclosures. of interest.
Continued attention will be focused on three core securities
offerings. Mutual funds/ETFs will be looked at for incentives that
There is the potential for elevated risk to retail customers influence decisions and fee discounts. Municipal securities/other
Retail-Targeted
surrounding certain products due to the nature of the product, fixed income securities will be examined for best execution, fair
Investments
market conditions, and concentration issues. pricing, mark-ups/mark-downs, and commissions. Finally,
microcap securities will be reviewed for pump and dump
schemes, market manipulation and illegal distributions.
Review for compliance and implementation of Reg BI after June
SEC adoption of Regulation Best Interest the Interpretation
30, 2020 for broker-dealers, and the content and delivery of
Standards Regarding Standard of Conduct for Investment Advisers, and the
Form CRS for both RIAs and broker-dealers. The examining for
of Care Form CRS Relationship Summary directly effect the retail
Interpretation Regarding Standard of Conduct for Investment
investor experience with broker-dealers and RIAs.
Advisors has already been implemented into the SEC program.
Copyright © 2020 Deloitte Development LLC. All rights reserved. 10Information security
Topic Background Focus
SEC will review for information security as part of its five
examination programs. Reviews will focus on configuration of
network storage devices, information security governance, and
Information security will continue to be focus due to the critical
retail trading information security. The focus for RIAs include
Information impact to financial markets and the confidence of participants.
governance and risk management, access controls, data loss
Security Security breaches may reach beyond individual firms to markets
prevention, vendor management, training, and incident response
and retail investors.
and resiliency. Additional review areas will be the adherence to
Regulation S-P and S-ID, along with online access, mobile
application access, and disposal of hardware.
Copyright © 2020 Deloitte Development LLC. All rights reserved. 11Financial technology (FINTECH) and innovation
Topic Background Focus
Emphasis will continue to be on investment suitability, portfolio
management and trading practices, safety of client funds and
Digital The digital asset market continues to expand and includes risk to
assets, pricing and valuation and effectiveness of compliance
Assets retail investors given the difference from traditional products.
programs and controls, and supervision of employee outside
business activities.
Examinations of investment advisers that offer clients services Focus will include RIA’s SEC registration eligibility, cybersecurity
Electronic
through automated investment tools and platforms “robo- policies and procedures, marketing practices, adherence to
Investment Advice
advisers.” fiduciary duty, and effectiveness of compliance programs.
Copyright © 2020 Deloitte Development LLC. All rights reserved. 12Focus areas involving RIA & investment companies
Topic Background Focus
A continuation of the review of dually registered firms, RIAs
affiliated with BDs, and registered reps of unaffiliated B-Ds.
RIA Compliance Will review the compliance programs of RIAs to ensure they are
Focus will be on adequate compliance programs that address
Programs reasonably designed, implemented and maintained.
best execution, prohibited transactions, fiduciary advice and
disclosure conflicts.
Never-Before and Not Focus will be on compliance programs for RIAs which have never
There has been substantial growth and changes to the
Recently-Examined been reviewed, new RIAs and RIAs that have not been reviewed
business model risk of RIAs.
RIAs in number of years.
Examination areas will be RIAs that use third-party
Due to the continued flow of funds into investment companies, administrators to sponsor the mutual funds they advice or
Mutual Funds
the SEC will prioritize the review of mutual funds and ETFs, affiliated with, mutual funds or ETFs that have not previously
and ETFs
activities of RIAs, and oversight by their boards. been reviewed, and RIAs to private funds that also manage a
registered investment company with a similar strategy.
Examinations of registered investment advisers who manage Focus areas will be on firms that provide management to
RIAs to
private funds, and the potential misuse of material, non-public separately managed accounts in addition to private funds, and
Private Funds
information, along with conflicts of interest. compliance risks associated with private funds.
Copyright © 2020 Deloitte Development LLC. All rights reserved. 13Focus areas involving broker-dealers & municipal advisors
Topic Background Focus
SEC will examine for the adherence and procedures surrounding
Broker-dealer Financial
A review for the safety of customer cash and securities. the Customer Protection Rule and the Net
Responsibility
Capital Rule.
Review of best execution for trading and other activities in “odd
Trading and Broker-
Examine the risk management practices of firms, which will lots”, supervision of algorithmic trading activities, and firm’s use
dealer Risk
include algorithmic trading retail investors. of internal procedures, practices, and controls to manage trading
Management
risk.
Focus areas will include registration requirements, professional
Will look at municipal advisors across various areas due to their qualifications, and continuing educations. Additional focus will be
Municipal
association to municipal securities or municipal financial placed on fiduciary duty of advisors, fair dealing with market
Advisors
products. participants, and disclosures of conflicts of interest (e.g., MSRB
Rule G-40).
Copyright © 2020 Deloitte Development LLC. All rights reserved. 14AML programs
Topic Background Focus
A continued focus on AML programs to ensure RIAs and B-Ds
have implemented adequate customer identification programs,
AML SAR filing programs, customer due diligence review programs,
The Bank Secrecy Act requires firms to address AML programs.
Programs and compliance with beneficial ownership requirements.
Additional focus will be placed on a firm’s robustness and
timeliness of independent testing of their AML programs.
Copyright © 2020 Deloitte Development LLC. All rights reserved. 15Market infrastructures
Topic Background Focus
SEC’s focus will be on those SEC SIFMU Clearing Agency’s, and
Clearing Dodd-Frank Act requires the SEC to examine annually registered
their core risks, processes and controls associated with each
Agencies clearing agencies designated as systemically important.
requirement under the Dodd-Frank Act.
Examinations will be on the operations of national securities
There are concerns over national securities exchanges’ members
National Securities exchanges, specifically their ability to react to market
potential for abusive, manipulative and illegal trading practices
Exchanges disruptions. Additional focus will be on the supervision of
which might harm the integrity of the marketplace.
member activity for compliance with securities rules.
Regulation SCI was adopted by the commission to Focus areas will continue to evaluate SCI entity’s policies and
Regulation Systems strengthen the technology of the securities market and requires procedures, which includes IT inventory management, IT
Compliance and SCI entities to establish, implement and maintain policies and governance, incident response, and third-party vendor
Integrity procedures to address their technology systems maintain a fair management. The SEC will also review for compliance based
and orderly market. upon previously identified issues from past examinations.
SEC will continue to examine transfer agents’ core functions Attention will be on the timely turnaround of items and transfers,
which includes maintaining issuers’ securityholder records, recordkeeping and record retention, and safeguarding of funds
Transfer recording changes of ownership, canceling and issuing and securities. Exams will be based around transfer agents that
Agents certificates, distributing dividends and other payments to serve as paying agents to issuers, transfer agents to developing
securityholders, and facilitating communications between issuers blockchain tech, and transfer agents that provide services to
and securityholders. issuers of higher risk securities.
Copyright © 2020 Deloitte Development LLC. All rights reserved. 16Focus on FINRA and MSRB
Topic Background Focus
SEC’s risk-based examinations of FINRA will focus on FINRA’s
FINRA FINRA’s examination program will be reviewed by SEC. operations and regulatory programs and the quality of FINRA’s
examinations of broker-dealers and municipal advisors.
MSRB, which regulates the activities of broker-dealers that buy, SEC will examine the MSRB to evaluate the effectiveness
MSRB sell, and underwrite municipal securities and also regulates of select operational and internal policies, procedures,
municipal advisors, will be examined by SEC. and controls.
Copyright © 2020 Deloitte Development LLC. All rights reserved. 17This presentation contains general information only and Deloitte is not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this presentation. About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. In the United States, Deloitte refers to one or more of the US member firms of DTTL, their related entities that operate using the “Deloitte” name in the United States and their respective affiliates. Certain services may not be available to attest clients under the rules and regulations of public accounting. Please see www.deloitte.com/about to learn more about our global network of member firms. Copyright © 2020 Deloitte Development LLC. All rights reserved.
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