FINRA Highlights Brokers' Integrity, Cyber Security in 2014 Manifest

The Financial Industry Regulatory Authority (FINRA) released its annual Regulatory and Examination Priorities letter, warning of a plethora of risk

The Financial Industry Regulatory Authority (FINRA) released its annual Regulatory and Examination Priorities manifest today, highlighting the myriad risk factors and bourgeoning issues that consequently could affect the market in 2014.

Finra-forced-to-hike-fees-due-to-'significant-loss'Each year, FINRA releases a statement that disseminates its projections and outlines the general situations across a multitude of markets and industries, specifically in a regulatory context that brokers and investors alike can utilize. In the United States, it is the largest independent regulator constituting all securities firms that do financial business domestically. According to Richard G. Ketchum, FINRA’s Chairman and CEO in a recent statement, “FINRA’s examination priorities for 2014 provide the industry with a road map of issues that may be of risk to the investing public. By providing clear and detailed guidance to firms, we hope to not only support firms’ compliance efforts but also to alert firms to the issues we have identified as the most salient risks to investors and the integrity of our markets.”

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The details and composition of the letter can be read in full, however the paramount issues FINRA addressed related to general business conduct, fraud, financial and operational concerns, and market regulation priorities.

Broker Integrity A Key Concern For FINRA

Brokers received a lot of attention coming into 2014 and rightfully so, investing is on the uptick and industries such as forex are rapidly growing financial constructs. “A small number of brokers have a pattern of complaints and disclosures for sales practice abuses and could harm investors as well as the reputation of the securities industry and financial markets,” the manifest warns. In an attempt to allay these concerns, FINRA implemented the ‘High Risk Broker’ program last year to create an Enforcement team designed specifically to arbitrate and deal with cases such as these. Subsequently, these brokers are flagged and when hired and brought in to a firm are observed for a variety of details, including the manner in which they are supervised and conditions of their hiring. Moreover, through comprehensive analytics model, FINRA uses past situations and present means to weigh and prioritize enforcement and observational efforts.

FINRA Addresses The Growing Concern Surrounding Cybersecurity

FINRAWith the sophistication of hackers seemingly growing by the year, the need for more complex and effective security seems requisite towards financial security and integrity. Only last July, CME Group was hacked and turned to the FBI to investigate, according to a statement published in November.

According to the FINRA letter, “Cybersecurity remains a priority for FINRA in 2014 given the issues reported across the financial services industry. In recent years, many of the national largest financial institutions were targets for disruptions through a range of different types of attacks.” In light of these attacks, FINRA has dedicated a team of evaluators that specialize in the examination and facilitation of investigations serving as a countermeasure.

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Targeting Firm’s Financial Statements To Foster Integrity And GAAP Standards

The integrity of information goes both ways and for broker-dealers, the sanctity and quality of the information and financial statements they are obligated to report must be presented throughout the year – not simply by years-end. In order to best meet this objective, FINRA recommends,

Firms should review the manner in which they maintain their books and records, and ensure that the firm has the proper expertise (employee(s) on or off-site financial operations principles) to maintain books and records that are accurate and prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP).

In addition, firms are encouraged to correctly calculate and prepare net capital and be distinctly aware of the Net Capital Rule – created and enforced by the SEC. According to  FINRA, these include,

(1) Failure to apply Open Contractual Commitment Charges, haircuts, undue concentration or blockage charges.

(2) Failure to comply with the Net Capital Rule at all times and as a related item, failure to cease operations when a firm is under capital until the net capital deficiency is cured.

(3) Failure to prepare books and records on an accrual basis, or only making proper accruals at the end of a broker-dealer’s fiscal year.

(4) Netting transactions in the absence of authoritative accounting guidance, which permits such netting.

The letter sent out by FINRA is intended to stimulate and address any potential concerns in the financial industry into 2014. Given the ever-changing climate, tangible risks are always potentially looming, and firms and brokers would be well served to conduct their business practices in the aforementioned manner.

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