FINRA sounds alarm on online distribution platforms
FINRA has sent out a warning shot about the proliferation of online platforms.
"Some member firms assert they are not selling or recommending securities when involved with online distribution platforms, despite evidence to the contrary," the regulator wrote in the latest installment of its annual exam priorities letter. That evidence includes "handling customer accounts and funds, or receiving transaction-based compensation," via the online services.
The new letter also covers money-laundering rules, fixed-income disclosures, cryptocurrencies and new regtech tools firms are using to stay compliant.
"This year's letter takes a somewhat new approach — as compared to similar letters issued in prior years — by focusing primarily on those topics that will be materially new areas of emphasis for our risk monitoring and examination programs in the coming year," FINRA's CEO Robert Cook wrote.
Online distribution platforms are a cause for concern because firms may use them to skirt some of their traditional compliance obligations. Online sales platforms have been embraced by unregistered entities, which sometimes work with registered firms to act as a selling agent or broker of record, the letter says.
FINRA says it plans to scrutinize how firms perform a variety of compliance functions in this area, including how they conduct reasonable basis and suitability analysis, as well as supervision and communications.
In 2019, brokers can also expect heightened scrutiny of how they are responding to a new regulation from the Treasury Department that took effect last May. The Financial Crimes Enforcement Network or FinCEN, a Treasury division that handles money-laundering issues, finalized a rule updating customer due diligence requirements for brokers, banks, mutual funds and other entities.
Under that regulation, the network is requiring firms to identify beneficial owners of accounts. FINRA says it expects brokers to demonstrate how they have come to "understand the nature and purpose of customer accounts" and how they conduct ongoing monitoring and submit suspicious activity reports.
The move follows calls for reform. Banned brokers, acting in lieu of attorneys, have made a living for decades representing investors.
"FINRA will focus on the data integrity of those suspicious activity monitoring systems, as well as the decisions associated with changes to those systems," the letter says.
Another new area of focus concerns fixed-income disclosures following the implementation of a new rule governing how dealers provide information on securities mark-ups and mark-downs.
FINRA examiners also will be focusing on new regtech advances, to "understand how [firms] are using such tools and addressing related risks, challenges or regulatory concerns."
Additionally, FINRA is warning about firms' rising interest in digital assets, such as cryptocurrencies.
The regulator also broke down how it uses risk monitoring to identify emerging threats and, when needed, crafts an appropriate regulatory response.
To delve further into these issues issues, FINRA is planning a spate of conferences this year, following the first it has already held in 2019.