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To summarize and interpret the examination priorities for 2017 published in early January by the Financial Industry Regulatory Authority (“FINRA”) and the Office of Compliance Inspections and Examinations (“OCIE”) of the Securities and Exchange Commission (“SEC”).

Summarizes some of the most important priorities raised by the OCIE and FINRA in the areas of senior investors, recidivist representatives, product suitability, complex investments and sales practices, cybersecurity, branch offices and anti-money laundering.

As in recent years, there is a significant overlap in priorities between the two regulators on issues of elderly investors, recidivist representatives, product suitability, and cybersecurity, among others.

Registered investment advisers and broker-dealers should note the key issues raised in both letters so that their compliance programs can address them in their policies, procedures, and controls before their next examination.

Practical guidance from lawyers whose practices focus on securities and broker-dealer enforcement defense.

To analyze FINRA’s focus on broker-dealer culture in its 2016 annual priorities letter and the application of the concept in FINRA disciplinary proceedings, to explain how that focus will affect FINRA’s examinations of firms, and to provide recommendations as to how a firm can develop or improve its culture of compliance.

This article examines FINRA’s current and historic pronouncements about “culture” in speeches, guidance, and decisions in disciplinary proceedings, and looks for common themes that should guide broker-dealers’ compliance.

This article concludes that even if the focus on culture might be regarded as an unnecessary overlay to the panoply of securities laws and regulations to which broker-dealers already are subject, firms should still take it seriously. It is now a focus of FINRA examinations for the purpose of fact-gathering, but FINRA might well elevate their concerns about culture into examination findings or worse.

This article gathers together all available information about the concept of firm “culture” and examines what aspects of the current focus represents legitimate concerns, and what aspects are unnecessary. The article takes the best of the guidance about culture and offers suggestions about how to improve a firm’s culture and, correspondingly, its compliance.

The purpose of this paper is to interpret Financial Industry Regulatory Authority (FINRA) Regulatory Notice 13-31, which provides practical advice to member firms about how FINRA will be examining for compliance with the rule, some findings about failures to comply and a set of best practices for compliance.

The paper explains the three suitability obligations set forth in Rule 2111, the mechanics of FINRA's suitability examinations, overall findings from FINRA's recent suitability examinations, and some measures and practices FINRA has highlighted that could bolster a firm's suitability-focused supervisory and compliance procedures.

The Notice provides a wealth of information on the types of approaches, systems, procedures and practices that member firms have been using and that FINRA has determined to be most effective in ensuring compliance with the suitability rule.

Although other ways to comply with the rule certainly exist, member firms should review the Notice and consider incorporating the practices discussed or practices likely to achieve similar outcomes.

The paper provides practical guidance from experienced financial services lawyers.

The purpose of the paper is to explain the implications of a FINRA disciplinary action and recommend ways for broker-dealers to assess their compliance with supervisory and recordkeeping obligations related to electronic communications.

The paper explains supervisory failures related to e-mail retention leading to a FINRA disciplinary action, discusses lessons learned, and recommends best practices that broker-dealers should consider implementing to ensure their systems are consistent with relevant FINRA rules including compliance audits, remediation of identified issues, training, and disciplinary actions.

FINRA is clearly signaling that directing firm resources to the building of a business without a similar commitment to compliance will not be tolerated.

The paper provides expert guidance from experienced financial services lawyers.

To explain expectations of the US Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA) as to what constitutes successful branch inspection programs for broker-dealers.

Summarizes FINRA’s rules requiring firms to implement branch inspection programs; examines the SEC’s and FINRA’s joint 2011 National Examination Risk Alert, which expanded upon FINRA’s rules, requiring firms to conduct risk-based analyses on each branch office to determine the appropriate frequency, intensity, and focus of inspections; discusses FINRA’s expectation that firms examine their registered representatives’ financial circumstances to reduce the risk of fraud; explains how FINRA’s Comprehensive Automated Risk Data System may impact branch inspections; and recommends several sources that firms should review when implementing a successful branch inspection program.

Regulators have heightened their expectations as to what constitutes successful branch inspection programs for broker-dealers.

To avoid regulatory intervention and discipline, firms should continue to review their policies and procedures to ensure that their programs are sufficiently comprehensive.

This article will encourage firms with branch offices to review their branch inspection programs, and assist those firms in implementing sufficiently comprehensive policies and procedures.

To explain the SEC's focus on the appropriate use of fee-based accounts and disciplinary efforts to identify and prevent “reverse churning.”

Describes the quantitative analytics used in the SEC's Risk Analysis Examinations (RAEs) to identify reverse churning and other problematic behaviors, explains why the inappropriate use of fee-based or “wrap fee” accounts and “double charging” can be unfair to investment clients, summarizes prior NASD and FINRA guidance and enforcement regarding fee-based account supervision, and recommends account monitoring actions that firms should take to ferret out reverse churning.

The SEC's continuing interest in reverse churning and double-charging, and its use of new examination and investigation tools, together suggest that the future will see more investigations and enforcement actions against firms who place clients in a fee-based or “wrap-fee” account without having adequate supervisory procedures to determine and monitor whether such accounts are appropriate for those clients.

Monitoring accounts to ferret out reverse churning has proven difficult for firms in the past, since spotting inactivity might be more challenging than detecting excessive trades (known as “churning”). However, it seems that the SEC and its staff are enhancing their ability to identify and address these violations.

Practical advice from experienced financial services lawyers.

To alert broker-dealers to Securities and Exchange Commission charges brought against a broker-dealer for ineffective controls over employee use of confidential information and to provide guidance regarding development and implementation of controls to protect against improper use of material non-public information by employees.

Reviews Securities and Exchange Commission settlement order with broker-dealer for violations of securities laws for failure to adequately prevent insider trading by employees and provides guidance for implementing control to prevent insider trading.

The Securities and Exchange Commission’s charges are the first to be brought against a broker-dealer for failure to adequately protect against insider trading. A broker used a customer’s confidential information regarding an impending acquisition by a private equity firm to purchase stock in the target company. The broker-dealer settled charges of violations of the federal securities laws for failing to adequately establish, maintain, and enforce policies and procedures to protect against insider trading by employees with access to confidential client information.

Practical guidance regarding internal controls at broker-dealers from experienced securities litigation and regulation lawyers.

To alert broker-dealers to the SEC’s plans to examine their cybersecurity practices, and offer advice on compliance.

Reviews the SEC’s proposed cybersecurity framework and provides suggestions for broker-dealers to address and respond to these proposals.

The SEC is still focused on gaining more information about the state of the cybersecurity industry in the broker-dealer context.

Broker-Dealers should review the framework and prepare to be flexible and responsive to changing guidelines that may emerge.

Breaks down the SEC guidelines in plain English and analyses the import of these guidelines. Offers practical advice for compliance.

To summarize and explain the U.S. Commodity Futures Trading Commission’s (CFTC’s) guidance regarding whether cryptocurrency is subject to CFTC jurisdiction.

The article reviews the CFTC’s March 24, 2020 final interpretive guidance, summarizes the history of the agency’s jurisdiction over leveraged, margined or financed retail transactions, and relates it to the CFTC’s guidance and judicial decisions regarding cryptocurrency.

We found that the CFTC, in carrying out its leadership role related to developments in the fintech industry, had provided clarity about its jurisdiction over cryptocurrency. The CFTC defines virtual currency as a “commodity,” even if intangible, and finds that many transactions in virtual currency satisfy the exception to the CFTC’s jurisdiction over leveraged retail commodity transactions because “delivery” can be said to occur within 28 days.

The article provides a useful summary of an important pronouncement from the CFTC in a manner that is readily understandable and relatable to industry participants and legal practitioners in this field.

To explain FINRA’s priorities for 2018, as reflected in its Annual Regulatory and Examination Priorities Letter.

Evaluates the overall tone of FINRA’s letter as self-reflective, describes most of FINRA’s priorities for 2018 as unchanged from previous years, and highlights new areas of focus for FINRA.

FINRA plans a number of organizational improvements over the next year which could facilitate positive dialogue between firms and FINRA examiners, helping to reduce the burden on broker-dealers and possibly avoid low-level enforcement action. FINRA expressed a desire to better leverage its model as a self-regulatory organization to achieve its mission. Most of FINRA’s priorities for 2018 are old standbys, including fraud, high-risk firms and brokers, cybersecurity and AML programs, product suitability vetting, and best execution surveillance. FINRA’s new areas of focus for 2018 include business continuity plans, technology governance, cryptoassets, options violations, new report cards, and new rules.

Despite FINRA leadership’s commitment to self-analysis and enhanced communication, FINRA continues to be highly committed to examining and addressing through enforcement action potential failures to comply with its rules. Firms facing FINRA or SEC examinations should brush up on FINRA’s old standby priorities and fine-tune their practices to ensure compliance with industry trends.

Practical guidance from experienced securities and financial services lawyers that summarizes FINRA’s stated approach for 2018.