2014 Exam Priorities Overview

January 2, 2014

 

Today, FINRA published its ninth annual Regulatory and Examination Priorities Letter to highlight significant risks and issues that could adversely affect investors and market integrity in the coming year.

 

This letter is an important part of our work to promote risk management and support your efforts to regularly update your compliance capability. Our goal in publishing this letter is to keep you informed about our examination program and regulatory concerns.

 

In addition to the topics we discuss in the letter, we want to let you know about other enhancements to our regulatory program. We are continuing to implement technological changes to support more robust risk analytics that will affect how we interact with your firm this year and beyond. You've heard us talk about the evolution of our regulatory program to be more risk based. Going forward, we plan to use technology to better analyze the data we're already gathering, and to gather more—and different—data to identify and prioritize risks to better protect investors and monitor the markets.

 

For example, our proposed Comprehensive Automated Risk Data System (CARDS) will further advance our analytical capabilities and is an example of how we intend to combine more sophisticated data collection with big data and "cloud" technologies. Specifically, CARDS would allow FINRA to collect—on a standardized, automated and regular basis—account information, account activity and securities holdings that a firm maintains as part of its books and records. You can read more about the proposal in Regulatory Notice 13-42. Your feedback on how the proposed system may affect firms will help FINRA determine how best to implement the system.

 

Similarly, in our market regulation program, we are using advanced technology to aggregate data across multiple trading venues in order to see trading patterns we weren't able to see before. We have expanded our cross-market equity surveillance patterns—as well as introduced a number of new threat scenarios to those patterns—to focus more specifically on certain types of manipulative trading activity uncovered in our investigations. Since we introduced the patterns last summer, we have found that nearly 44 percent of the manipulation-based alerts involved conduct on two or more markets. And 43 percent of the alerts involved conduct by two or more market participants. These surveillance patterns canvass activity on the markets FINRA oversees, including NASDAQ's and NYSE's family of markets. In all, this activity now amounts to 80 percent of the volume of listed equity securities and, upon the integration of Direct Edge early this year, will soon grow to 90 percent of the market.

 

All the data that we're gathering and analyzing is also helping us see effective—and sometimes ineffective—compliance practices. We're committed to communicating the effective practices we find to help firms improve their compliance programs and better manage their risks. The Report on Conflicts of Interest in the broker-dealer industry we issued in October is an example of the way in which we hope to provide examples of effective practices to the industry.

 

Throughout the year, we will continue to update you on these and other activities in our regulatory programs. I encourage you to let me know any other areas where you think FINRA should focus and I look forward to continuing a dialogue with you on how we can better protect investors and the markets.

 

Sincerely,

 

Richard Ketchum Signature
Richard G. Ketchum  
Chairman and CEO