Operational and Financial Risks for 2018 According to FINRA

By: Esmat Hanano, IAC Intern Spring 2018

This is the third post in a series about the Financial Industry Regulatory Authority’s (“FINRA”) 2018 Regulatory and Examination Priorities Letter (“Letter”). This post focuses on the operational and financial risks identified by FINRA in its Letter. The operational and financial risks section of FINRA’s Letter discusses the areas of concern that FINRA foresees being an issue for members in the coming year. This year’s Letter focuses on a number of issues, specifically: Business Continuity Planning, Customer Protection and Verification of Assets and Liabilities, Technology Governance, Cybersecurity, Anti-Money Laundering, and Liquidity Risk. This post will cover the first three issues, and the next post in the series will cover the rest.

Given the recent increase in natural disasters and emergencies, FINRA has identified Business Continuity Planning (“BCP”) as an area member firms should focus on in the coming year. BCP involves the creation of processes and systems to deal with unexpected events that might threaten the operations of a company. FINRA Rule 4370 already requires member firms to “maintain a written continuity plan.” However, FINRA will review firm plans to make sure that they will be able to meet the needs of customers and investors who are caught up in emergencies where those plans will come into effect.

The next area of focus for FINRA is Customer Protection and Verification of Assets and Liabilities. FINRA will evaluate member’s ability to protect customer financial information under Securities Exchange Act Rule 15(c)3-1 and 3-3. This requires FINRA to go through firm records to determine that the processes firms use are adequate to verify and protect customer information. This is a fundamental mission for FINRA, and it will continue to pursue that mission through its evaluations.

FINRA will also be reviewing firm’s technology management policies and procedures. FINRA has found that there have been significant “customer service and regulatory problems” relating to member firms use of technology. The reasons that there have been technological problems stemming from mechanical breakdowns and lack of capability on the part of firms. FINRA hopes to remedy these issues through its review process so that member firms can continue delivering the service that customers deserve.

These three areas are critical to maintaining high quality services by FINRA members. Focusing on them will allow FINRA to increase customer satisfaction with the firms and their products.