FINRA Announces 2016 Priorities

FINRA released its priorities for 2016 this week, with many new priorities appearing on this year’s list. While many of the same (or similar) target areas appear, we wanted to highlight a few new ones that may be of interest to you.

In a continuation of its vigilance for potential conflicts of interest, FINRA will shift its focus this year to outside business activities (OBA). Specifically, checking for compliance outlined in FINRA Rule 3270, which establishes review procedures for OBA. Per the priority letter,"... one of FINRA’s most common examination findings is that firms have not, or have not adequately, assessed registered representatives’ written notifications of proposed outside business activities." After reviewing these notifications, firms must then decide if the OBA interferes (or could be viewed as interfering) with responsibilities owed to customers. In some instances, the OBA will require treatment as a private securities transaction, so FINRA will be checking for compliance with Rule 3280 in those instances as well. 

FINRA also calls for a focus on 529 College Savings Plans, which they did not mention as a priority last year. FINRA has found instances where large C share purchases have been made by customers in 529 plans, when they should have been placed in A shares. Per the letter, "FINRA expects firms that recommend a specific share class to conduct an analysis to determine that fee and expense structures are appropriate for a customer." FINRA spent some time last year focused on making sure customers were being placed in the right share class based on fee structures, but the addition of 529 plans is new.

Another area of focus will be bond pricing and the determination of fair versus excessive mark-ups and mark-downs. FINRA has at least two concerns in this area: instances in which new issues are offered to customers from the firm's inventory at higher than offering prices, and the lack of a rule requiring dealers to disclose mark-ups/mark-downs on corporate and municipal bonds. The second concern is connected to FINRA's focus on conflicts of interest, as the lack of disclosure makes it hard for clients to determine dealer compensation on trades. FINRA plans to use TRACE and EMMA data in order to "...ensure that investors are treated fairly, that firms are complying with fair pricing obligations and that they conduct bona fide public offerings." We've blogged before about the difficulty of establishing “fair” bond prices, and have produced a much longer piece specifically addressing issues related to municipal bond pricing and some of the limitations of using the data available in EMMA. Part One of that piece is currently available in the ABA's Securities Litigation Journal, with Part Two appearing in the next quarterly issue.

Those are just a few of the new issues that FINRA will be delving into in 2016. Over the next few weeks, using data from RegTelligence™, we will take a look back at FINRA's enforcement record for 2015, comparing their actual activity with the priorities they outlined last January. We believe this exercise will be informative to those who must prepare to respond to FINRA's new priorities released this week.

For more information about Bates Group's services, please visit the Bates Group’s website at www.batesgroupllc.com.

Bates Compliance Solutions - Esdras Vera - 971.250.4360 or evera@batesgroupllc.com

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