Operational and Financial Risks According to FINRA: Part 2

By: Esmat Hanano, IAC Intern Spring 2018

This is the fourth post in a series of blog posts about the Financial Industry Regulatory Authority’s (“FINRA”) 2018 Regulatory and Examination Priorities Letter (“Letter”). This post covers the operational and financial risks identified by FINRA in its Letter. Specifically, this post will discuss FINRA’s focus on cybersecurity, anti-money laundering, and liquidity risk.  As many sectors of the economy become more dependent on technology and cyber capabilities, cybersecurity has become a top priority for many large firms. FINRA recognizes the importance of cybersecurity and will be evaluating member firm’s cybersecurity capabilities to make sure that they can withstand cyber-attacks. Moreover, FINRA has required that firms have detailed policies in place to deal with cybersecurity threats. The focus on cybersecurity, coupled with the evaluation of technology governance procedures, shows the importance of making sure that member firms are prepared for continuing developments in cyber technology.

FINRA has identified a number of problems with members in regards to their anti-money laundering protections. The adequacy of member’s policies and procedures, and their “resources for [anti-money laundering] monitoring” will be evaluated by FINRA in 2018. The potential for members to be implicated in money laundering through their foreign affiliations has pushed FINRA to increase scrutiny of high-risk transactions with those foreign firms. Additionally, FINRA will be emphasizing the importance of Rule 3310(c). This rule requires members to have a program designed to comply with the Bank Secrecy Act and other Treasury Department regulations that relate to money laundering.

The last major area that FINRA has identified in its operational and financial risks for 2018 is the liquidity of member firms. FINRA will evaluate firm’s liquidity planning and compare them with each other to determine which ones need to be redesigned to meet FINRA’s standards. The adequacy of a firm’s liquidity plan directly affects customers because the liquidity of a firm dictates whether it will be able to handle a sudden increase in customer activity. To test the liquidity planning of firms, FINRA will be looking at the material assumptions that are made in firm stress tests. Stress tests are used to examine a firm’s liquidity by imagining catastrophic financial events that would lead a firm to draw on its liquid assets. By reviewing the material assumptions made in the stress test, FINRA will be able to determine whether firms are properly testing their liquidity.

The operational and financial risks section of FINRA’s 2018 Letter indicate that the organization is taking its responsibilities to customers seriously. FINRA will be evaluating a number of areas within member firm’s operations to make sure that the financial industry moves towards providing high quality services across the board.