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2023’s Must-Read | Report on FINRA’s Examination and Risk Monitoring Program

January 10, 2023

The best tool FINRA provides when it comes to firms developing their annual compliance program is now available. The 2023 Report on FINRA’s Examination and Risk Monitoring Program provides key insights and observations on two dozen key regulatory topics, making it a must-read for compliance professionals.

On this episode, Ornella Bergeron, Senior Vice President of Risk Monitoring, Michael Solomon, Senior Vice President of Examinations, and Bill St. Louis, Executive Vice President of the National Cause and Financial Crimes Detection Programs (NCFC), join us to dig into some of the new and noteworthy topics in the latest report.

Resources mentioned in this episode:

2023 Report on FINRA’s Examination and Risk Monitoring Program

Episode 112: Introducing FINRA’s Complex Investigations and Intelligence Team and Cyber and Analytics Unit

Episode 71: Overlapping Risks, Part 1: Anti-Money Laundering and Cybersecurity

Listen and subscribe to our podcast on Apple PodcastsGoogle PodcastsSpotify or wherever you listen to your podcasts. Below is a transcript of the episode. Transcripts are generated using a combination of speech recognition software and human editors and may contain errors. Please check the corresponding audio before quoting in print. 


00:00 - 00:25

Kaitlyn Kiernan: The best tool FINRA provides when it comes to firms developing their annual compliance program is now available. The 2023 Report on FINRA's Examination and Risk Monitoring Program provides key insights and observations on two dozen key regulatory topics, making it a must-read for compliance professionals. On this episode, three Member Supervision senior leaders join us to dig into some of the new and noteworthy topics in the latest Report.

00:25 – 00:34

Intro Music

00:34 - 01:02

Kaitlyn Kiernan: Welcome to FINRA Unscripted. I'm your host, Kaitlyn Kiernan. I'm pleased to welcome three guests from the Member Supervision senior leadership team to kick off the new year with us. Joining us today are Bill St. Louis, Executive Vice President of the National Cause and Financial Crimes Detection Program, or NCFC. We have Ornella Bergeron, Senior Vice President of Risk Monitoring, and a new guest, Michael Solomon, Senior Vice President of Examinations. Michael, Ornella and Bill, welcome to the show.

01:02 - 01:02

Ornella Bergeron: Thank you.

01:03 - 01:03

Michael Solomon: Thanks. Glad to be here.

01:04 - 01:13

Kaitlyn Kiernan: So, to kick us off, can you each introduce yourselves and tell us what you do within Member Supervision? Michael, as the newcomer to the podcast, maybe we'll start with you.

01:13 - 01:59

Michael Solomon: Sure. Thanks, Kaitlyn. So, I run FINRA's national Examination program. I have a team of about 700 examiners and managers that perform roughly 1,000 examinations each year based on a firm's risk. We work closely with Ornella's team to determine which firms will be on our annual exam plan and which areas of those firms we will look at in that exam. Every firm gets examined at least every four years. I've been in this role since this past June. Before that, I was a Chief Compliance Officer and General Counsel at a member firm for about three years. And then prior to that I spent seven years as FINRA's Northeast Regional Director. So, this is my second turn at FINRA in a senior role and I'm glad to be back.

01:59 - 02:06

Kaitlyn Kiernan: One of our boomerang employees. Well, we're glad to have you back, Michael. You mentioned working closely with Ornella. So, Ornella, how about you?

02:07 - 02:31

Ornella Bergeron: Hi, everyone. So, I lead the Risk Monitoring Program for Member Supervision. And for those of you that may not be as familiar with the Risk Monitoring Program, risk monitoring teams are those designated points of contacts for firms on numerous regulatory touch points. They're also responsible for monitoring the financial, operational conduct and trading risks for member firms, among other things.

02:32 - 02:34

Kaitlyn Kiernan: And Bill last but not least, how about you?

02:34 - 03:21

Bill St. Louis: Hello, everyone. So, I lead NCFC, the National Cause Financial Crimes Group within Member Supervision. It generally is comprised of three teams. There's the Cause Program that does investigations prompted by terminations for cause, customer complaints, tips, et cetera. There's also a Market Investigations Team that does, among other things, offering, insider trading and market fraud investigations. And third, there's a team of specialists under the umbrella Complex Investigations and Intelligence, or CII. They include AML, Financial Intelligence Unit, cyber security, and also a team that specializes in elder abuse investigations.

03:22 - 03:39

Kaitlyn Kiernan: Thanks, Bill. So, the three of you are here today to talk about the 2023 Report on FINRA's Examination and Risk Monitoring Program. This report will probably be familiar to many of our listeners, but for those who aren't yet familiar, Michael, can you tell us what this report is and how firms can use it?

03:40 - 05:33

Michael Solomon: Sure. It's a pretty unique document in terms of what regulators produce annually. Many regulators produce a somewhat similar report, but our Report goes into a great deal of useful detail and provides firms a lot of insight into findings from FINRA's various regulatory operations, including examinations, investigations, enforcement, risk monitoring and surveillance, over the course of the entire year to provide both findings that we have come across and best practices.

Firms typically use the report as a good reference tool in order to evaluate and hopefully strengthen their controls and their supervisory processes and their procedures. Typically, a firm would ask, "Are we in this area and how do we stack up relative to what the Report suggests? Are other firms having difficulties or other firms having useful processes and procedures?" The report provides information on areas that FINRA seems to find more frequently firms are having challenges, so it's not all inclusive of everything a firm is responsible for.

To the extent whether we will examine a firm on these areas, it really depends, as I've said, on our assessment of the firm's risk and its business model. I was a CCO, as I mentioned before, and I always found the report extremely helpful to drive our annual testing plan to see where we look like we are doing well or where we might need to enhance our procedures. And I also found it was useful to provide a summary of the report to senior business leaders to show them what's on the minds of our primary regulator and where more resources might be needed in the following year. So, I've also found every year it seemed to evolve into a more and more helpful tool rather than just merely the findings that we used to produce. This is more all-encompassing, I think, provides a lot of very, very useful guidance.

05:34 - 05:40

Kaitlyn Kiernan: And this report's been published about a month sooner than in past years. Why is that?

05:41 - 06:10

Michael Solomon: Each year we strive to produce it earlier and earlier, and we know that most firms quickly, in the beginning of the new year, determine what they're going to use their limited resources to focus on from a compliance and supervision standpoint, and as I said, to try to determine what their testing program is going to be like. So, the earlier in the year we do that, I think it does provide a jumpstart to firms to be able to utilize the good information in here to formulate their compliance and supervision processes for the coming year.

06:12 - 06:15

Kaitlyn Kiernan: So, beyond the timing, Bill, what else is new with this year's report?

06:16 - 07:44

Bill St. Louis: Well, there's a lot that's new in this year's report. The 2023 report continues to address topics that remain perennially important for firms. For example, Reg BI and Form CRS, a topic that we get quite a bit of questions about, communications with the public and best execution, among other topics. So, those topics are covered in this year's Report, and they're updated to reflect evolving risks, industry trends and findings from our recent oversight activities.

We also broadened the content of the Report this year by adding four new sections. There's a section on Manipulative Trading, Fixed Income – Fair Pricing, Fractional Shares, and Reg SHO. We also included a new section, entitled Financial Crimes, consisting of three topics: AML, fraud and sanctions, cybersecurity and technological governance, and manipulative trading. And we'll talk a little bit more about that new section and why. We also generally set forth a holistic view of findings from across all of our oversight activities in our Member Supervision, Market Regulation and Enforcement Programs. So, one thing that's helpful is that all of the new material has clearly been noted in the report, so it's easy for people to navigate.

07:45 - 08:04

Kaitlyn Kiernan: And before we dig into some of those new topics, like you mentioned, I want to first touch on the overall structure of the report. In addition to identifying the regulatory obligations for firms, each section includes related considerations, findings and effective practices. Ornella, can you remind us of the differences between these sections?

08:05 - 09:32

Ornella Bergeron: Sure. So, I'll start with related considerations. Related considerations are questions that we may ask or consider when we're examining your firm for compliance with certain federal securities laws, regulations and FINRA rules. These questions aren't necessarily tied to specific provisions of the regulatory obligations. The areas that they're denoted in, they're really meant to help firms generally think about their compliance programs and processes, findings or those issues or concerns that we've identified during exams as well as during market surveillance and investigations and enforcement activities. There are certain topics that you'll see, like, for example, cybersecurity or liquidity risk that don't have findings, but instead they have observations. Observations aren't rule violations, they're suggestions or recommendations to a firm about improving their control environment to help mitigate risk. In certain sections you'll also see it denoted as emerging risks, for example, financial crime involving senior investors. And these represent potentially concerning practices that FINRA has observed and that will most likely be receiving additional scrutiny going forward. And finally, each report topic includes effective practices FINRA has observed at some firms during exams or during monitoring that will help member firms evaluate their compliance program depending on the firm's business model and activities that they're involved in.

09:33 - 09:41

Kaitlyn Kiernan: There's also a section under each topic for additional resources. What kind of information can readers expect to find there?

09:41 - 10:07

Ornella Bergeron: Yeah, there’s a lot of really good information in this report. So, firms can find a list of relevant notices, other reports, tools and online resources, including, for example, episodes of prior FINRA Unscripted. The report also has an appendix that includes ways that firms have used the report in the past, helpful hints, as well as other FINRA publications to help them enhance their compliance programs.

10:07 - 10:29

Kaitlyn Kiernan: Thank you for helping lay the foundation there. Now, I want to dig into some of the new topics in the report. This is a very long document. If you look at the PDF version, it's dozens of pages long. So, we can't get to all of them. But Bill, I do want to touch on the new financial crimes section you mentioned. What was the impetus for creating this new bigger section?

10:30 - 10:58

Bill St. Louis: This section includes material on three topics: AML, fraud and sanctions; cybersecurity and technological governance; and manipulative trading. We wanted to highlight these sections not only because of what we're hearing and seeing from firms, but we also wanted to just underscore our increased focus on protecting investors and safeguarding market integrity against these ongoing threats.

10:59 - 11:09

Kaitlyn Kiernan: The AML section of the report is very, very meaty and our AML episodes are some of our most popular for the podcast. So, is there anything new worth flagging in that area?

11:10 - 12:39

Bill St. Louis: The biggest theme in terms of what's new, are issues we're seeing with respect to accounts being opened using stolen or synthetic identities, what we refer to as new account fraud, a threat that primarily impacts firms that offer online account opening services, but not totally limited to those firms. So, what we're seeing and what firms are experiencing is that once these fraudulent accounts are open, they can and are being used for a range of suspicious or illicit activities, including fraudulent account transfers to ACATS, an issue that we highlighted in Reg Notice 22-21. And we've also called out this issue in Notices 20-13, 20-32, 21-14 and 21-18. I think just the fact that we covered this issue as much as we have just highlights how egregious it can be and how seriously we're taking it. The report this year covers our findings related to this threat and highlights examples of effective practices being used by firms to mitigate this threat and how to comply with rules and regulations such as the CIP rule, the customer due diligence rule and Regulation S-ID. Outside of the account fraud, the report also highlights manipulative trading with small cap IPOs and sanctions evasion as emerging risk areas.

12:40 - 12:47

Kaitlyn Kiernan: How has the way firms need to look at and monitor financial crimes changed over the past few years?

12:48 - 14:29

Bill St. Louis: It's clear that as the fraudulent activities evolve, the firms need to evolve their approach in this space. The ways in which money laundering, fraud and cybersecurity threats are merging often means that firm AML programs must work more closely with business units that are in perhaps a better position to detect and escalate red flags to the AML program. While this is true of new account fraud, with respect to the ways in which bad actors engage in identity theft and then use that information to open brokerage accounts in the names of their victims, another example from the 2023 report is in the Cybersecurity and Technology Governance section, which highlights that FINRA has identified instances where firms did not have reasonably designed procedures to investigate cyber events and considering whether a SAR filing should be made. So, there's clearly a nexus between cyber and AML, and many cyber threats should be strongly considered for filing a SAR. Given the ways in which cyber-enabled crime impacts investors, markets and financial institutions, detecting and reporting on suspicious activity through SAR filings provides critical intelligence to law enforcement and other agencies working to combat these threats, and member firms should ensure that they have established written escalation procedures and recurring cross-department communication between AML, compliance and any other relevant business being in a position to detect and escalate red flags.

14:29 - 14:35

Kaitlyn Kiernan: And on the topic of cybersecurity, is there anything new worth flagging on that front?

14:35 - 16:08

Bill St. Louis: The report provides an update on effective practices, including the risks associated with ransomware. That was an issue that was also covered in Reg Notice 22-29. It also addresses monitoring and overseeing the security controls and branch offices and managing the risks associated with the firm's critical vendors or third-party providers. That's a topic that we've addressed in several reports, oftentimes highlighting new effective practices that we've seen member firms deploy. As with many aspects of our industry, the controls really need to be tailored to the specific firm. And it's not one size fits all, clearly. Given the continued growth in cyber-enabled fraud across the financial industry, we, FINRA, have established a new Cyber and Analytics Unit to do a couple of things: to enhance our ability to proactively address the evolving cyber threat landscape and also, we're looking at growing issues related to crypto asset-related fraud. Our Cyber and Analytics Unit has a team that examines member firms' cybersecurity risk management through reviews of their controls. Another team is responsible for conducting investigations of cyber-related fraud. There’s a team that investigates and examines crypto asset activity and a team that uses innovative data analytics to target the top threats that impact the unit and to deliver actionable insights that we share with the Exam Program.

16:09 - 16:27

Kaitlyn Kiernan: Thanks, Bill. We just had a podcast introducing that new team too, so we can link to that in our show notes. So, best execution and order handling is in focus for the SEC. So, that seems like a section of the report that's worth checking out. Ornella, is there anything you can share from this year's report on that topic?

16:27 - 18:28

Ornella Bergeron: Definitely an area to check out because it is a focus of our regulatory program as well and has been for many years. We continue to assess member firms' compliance with their best execution obligations under our best execution and interpositioning rules, as well as Rule 606 of Regulation NMS. This year's report includes a number of very helpful considerations for firms regarding best execution, including as it relates to payment for order flow, execution quality reviews, and how firms consider and address potential conflicts of interest relating to routing orders.

As we highlighted in last year's report, FINRA conducted targeted regulatory reviews in this area in recent years. Specifically, we started targeted exams back in 2020 to evaluate the impact of not charging commissions on member firms' order routing practices and decisions and other aspects of member firms' business. Last year, we also launched targeted reviews of wholesale market makers concerning their order handling practices for customer orders they received from broker dealers. So, this year's report includes findings and observations from those targeted efforts, in addition to observations from our ongoing regulatory efforts.

I'll mention a couple of highlights. First, firms not conducting periodic regular and rigorous reviews of the quality of executions of its customer orders or customer orders from other broker dealers. Or in some cases, when conducting such reviews, not considering certain execution quality factors that are required by the rules. The other item I’ll mention is is we saw issues with firms not publishing accurate quarterly reporting reports under Rule 606. For example, reporting only held orders instead of both held and not held. For example, for listed options inaccurately classifying orders, incorrectly stating that the firm doesn't receive payment for order flow from execution venues. Just some examples.

18:28 - 18:48

Kaitlyn Kiernan: Thanks, Ornella. Now, Bill, you mentioned Reg BI and Form CRS. We're about two and a half years into the implementation of these regulations, so there is still a lot of interest to many firms. Most of FINRA's exams next year will fully encompass the post implementation period. So, Bill, how does this year's report reflect that shift?

18:49 - 19:58

Bill St. Louis: I think that this is a topic that generates quite a bit of interest in the industry. The report reflects that our examinations, since the implementation of the Rules, have evolved. They're deeper exams. They’re looking at more material, more recommendations, really, now that the time has passed since implementation. I think that the report does a good job of highlighting some of our findings in this area and some of the better practices that we've seen. Areas of focus in the report are firms needing to make recommendations that obviously adhere to Reg BI's care obligation, identifying and addressing conflicts of interest, disclosing to retail customers all material facts related to conflicts of interest, establishing and enforcing adequate written supervisory procedures, including the provision of some level of effective staff training and also filing and delivering and tracking accurate Form CRS filings. We continue to see some firms not complying with the Form CRS obligation.

19:58 - 20:09

Michael Solomon: A lot of questions I often get from the industry is how do we make sure we're treating firms consistently with respect to findings related to Reg BI since it's a new Rule. I know you helped design some internal processes.

20:09 - 20:50

Bill St. Louis: We have created an internal disposition group that vets all of our findings across the Cause program, the Exam program. It's an excellent way for us to ensure consistency in how we handle our findings and how those findings get resolved either informally or through referral to enforcement. It's also a great mechanism for us to identify potential interpretive issues that we can then escalate to the SEC. So, from day one, we were very focused on really having a consistent approach to this major new rule set and our findings in this area.

20:50 - 21:01

Kaitlyn Kiernan: And Michael, is there anything you want to flag in terms of how the exam team will be focusing and how it'll progress over the course of the coming year when it comes to Reg BI and Form CRS?

21:02 - 23:33

Michael Solomon: Sure. As Bill's mentioned, and most firms have experienced, we spent a lot of time on Reg BI in many of our exams. And we focused a lot of the time on procedures and processes and Form CRS. I think we're going to be moving more towards delving in a little deeper on point-of-sale issues. I think you'll likely see more churning cases. As most people know, we no longer need customer cooperation under Regulation Best Interest. FINRA recently had its first Enforcement case under Reg BI for churning, so you'll likely see more of those. We'll look more into complex products and the intersection of Reg BI with complex products, which has been a perennial issue of focus for FINRA. I've asked the team to focus more on the new product process and how Reg BI has been incorporated into that, particularly with respect to reasonable alternatives to a new product and whether those alternatives are provided to advisors as part of the roll out of new product.

Account type recommendations is an area that we're going to look more into to make sure there's rigor in terms of deciding whether a brokerage or a fee-based product or other account types are in the best interests of the client and documenting that decision. That ties it to the gaming of fee-based accounts versus brokerage accounts where we're seeing some issues. And I think we're going to look to explore further things like activity in brokerage accounts before converting the account to a fee-based account. Other areas that we're going to spend more time looking at is front-end and back-end recruitment packages that provide incentives in terms of revenue hurdles in order for an advisor moved to a new firm to obtain a back-end bonus and the conflicts in the disclosures and the supervision and surveillance of those hurdles that are required for sometimes large payouts.

In that vein, often firms should be looking at higher-cost products and which advisors seem to be selling more higher-cost products than would otherwise be normal for that type of advisor. We're going to spend more time looking at conflict inventories and how firms have maintained those, updated those, and addressed the conflicts that they put on those inventories. We've also seen some simply wrong interpretations on what is a recommendation. And so that's an area that we're going to try to bore into a little bit in terms of how firms decide on what is a recommendation, whether they're accurately doing that. So, that's just a couple of the areas that I think firms will likely see a change and pivot in what we've been looking at over the last year or two.

23:34 - 23:48

Kaitlyn Kiernan: Sounds like a lot of interesting things to look at there. Now, Michael, you mentioned complex products, so, some products do seem ripe for that Reg BI analysis like variable annuities. Is there anything you would want to mention further there?

23:49 - 25:14

Michael Solomon: Yeah, there's a section in the report. VA's have been a perennial focus at FINRA given their complexity, their high fees to the investor and the high levels of remuneration to advisors that create significant incentives that have to be monitored carefully and supervised carefully. In particular, replacements or switching one annuity for another continues to be the highest risk area in the annuity space and is where the majority of our findings are, where investors may be losing valuable benefits in that switch or incurring surrender fees that they're not adequately aware of. We've seen some deficiencies in firms' surveillance that they're required to have under FINRA Rule 2330 with respect to the rates of VA exchanges to see if there are advisors who are outside the norm in terms of their exchange rates. Also, when we ask for information and documentation on VA switches, we've seen too many instances where firms aren't collecting, retaining adequately, that information that they're required to maintain and surveil and supervise and also to provide to us for our examination processes. So, we've seen some issues there. Lastly, I'd say that one area that the report notes is the failure to evaluate and supervise additional deposits that are made by investors into a VA and to make sure those additional deposits are in the best interest of the client.

25:15 - 25:24

Kaitlyn Kiernan: So, sticking with the theme of retail investors, mobile apps are again covered in this year's report. Ornella, what's new and noteworthy there?

25:24 - 27:11

Ornella Bergeron: I'll start by saying that we are continuing to see an increase in the offering of mobile apps by firms. So, it does continue to be an area where the risks potentially become much more significant. As we highlighted in our report last year, mobile apps can certainly benefit investors in several ways. But they do also raise novel questions and potential concerns, such as whether they encourage retail investors to engage in trading activities and strategies that may not be consistent with their investment goals or their risk tolerance. Also, the interface, design and functionality of the app, for example, push notifications could influence investor behavior.

The report discusses our observations of potential issues with some mobile apps that we've reviewed during our examination work, including, for example, some mobile apps not adequately distinguishing between the products and services that are offered by the broker-dealer and those of their affiliates or third parties. We saw, for example, in the area of crypto assets where it wasn't always clear that it was the crypto asset affiliate or the third-party that was offering the crypto assets and not the broker-dealer. And also in some cases, if the broker-dealer facilitated the purchase through the affiliate their role wasn't really clear. And this raises confusion by clients about whether a product is protected under SIPC, under FDIC, or not protected at all.

The other area was around disclosures where we identified concerns with certain mobile apps. We observed that disclosures and explanations of the risk and those higher-risk products or services such as the certain option and margin lending activities really weren't clear in the disclosures or in some cases, they were not adequate.

27:11 - 27:31

Kaitlyn Kiernan: Certainly, a good section to check out. And speaking of apps, it's not just a firm's own app that they have to have top of mind. There's also the issue of off-channel communications that could be happening through communications apps and elsewhere. Michael, can you share some insights from the report on this issue and what firms should be thinking about?

27:32 - 29:43

Michael Solomon: Sure. The report does highlight this and the approximate $2 billion in fines that the SEC has obtained from many of the largest firms with respect to employees communicating internally and externally away from compliant firm communication channels. This is an area that obviously firms have and are struggling with in terms of supervision and controls and processes to ensure that their employees are communicating compliantly, that communications can be retained and supervised and surveilled.

I can go through a couple of areas that we're going to be exploring in the exam program in this space this coming year. We'll be looking at how firms are supervising for off-channel communications. What the firm has done to address it, what kinds of compliant technologies firms have incorporated to ensure employees have the ability to text in a compliant manner, and whether all firms are getting this technology or just a subset of employees are getting it. How firms monitor if somebody does not utilize that technology enough, which could be a red flag in and of itself. The tone from the top for the messaging in terms of the importance of every employee communicating only through firm systems that ties into the training that we'll be looking at to see that there's adequate training so employees know what they can and can't do, where the firms have changed their email lexicons to try to determine whether their suggestions that a communication be taken away outside of a firm system.

We'll be looking to see whether texts are fully ingested, just like emails and whether those texts are surveilled in the same manner and supervised in the same manner as other electronic communications. We'll be looking at firms' policies and procedures, their annual compliance questionnaire process, which typically does ask about this and essentially whether employees understand that, acknowledge that, and whether there are adequate consequences for employees who are not fulfilling their obligations to communicate in a compliant manner. So, there's more coming out, but it's an area that we're going to be looking at more deeply in 2023 to see how firms are complying in this area.

29:44 - 29:52

Kaitlyn Kiernan: Now, Ornella, the Funding Portal section of the report, has also had some significant additions. Can you flag the additions there?

29:53 - 31:14

Ornella Bergeron: Sure. So, this is the second report that we're highlighting funding portals. And it is an important year to highlight given that we are continuing to see a steady growth in the number of registered funding portals. The number actually now exceeds 80. So, one of the most important functions of funding portal, as many know, is to act as a gatekeeper to issuers on its platform. But during certain exams we are seeing instances, however, where the funding portals are not denying access to their platforms to issuers where there are clear red flags suggesting potential for fraud, for example, by not providing all the required disclosures or otherwise making misleading or exaggerated statements.

We're also seeing that some funding portals are making recommendations or offering investment advice. It is prohibited under the JOBS Act and regulation crowdfunding. A couple of other frequent findings that we're observing in this space. For example, certain portals are not reporting customer complaints to FINRA. We're seeing some issues with some funding portals not filing a CMA when there's a change in ownership in the funding portal. Also, finally, we're seeing some cases where funding portals didn't ensure that investor funds were being returned promptly if an offering was, for example, not successfully completed or if the return of funds is otherwise required by regulation funding.

31:15 - 31:22

Kaitlyn Kiernan: And to wrap things up, I want to turn briefly to Liquidity Risk Management. Ornella, what updates does the report have on this area?

31:23 - 32:57

Ornella Bergeron: Liquidity risk is definitely a topic that we see often in this report. It's been there for as long as I can remember. It really is an essential element of member firms' financial responsibility and an area that we've spent a lot of time, both from the risk monitoring perspective as well as on exams. And especially given the many market events that we've all experienced over the last several years, which continues to reinforce the importance of having effective liquidity control framework. These events really can cause a drain on liquidity for some firms.

So, what's new for us? This year we began collecting additional liquidity information from certain firms on the new supplemental liquidity schedule, which some of our larger firms file as a supplement to the FOCUS Report. With the additional information that we're receiving we're able to better assess liquidity risk exposure at our member firms, those that have the largest customer and counterparty exposures.

I'll just mention a couple of observations from some of our examinations. So, first, in terms of stress testing, we are seeing in some cases that firms are not establishing reasonable clearing deposit requirement stress amounts in their stress tests. We're seeing that clearing deposit stress sometimes are based on information that doesn't accurately reflect the business operations of the firm. And then also another area we're seeing in some cases where firms are not developing liquidity contingency plans to operate in a stressed environment, including, for example, the process for accessing liquidity and standards on how liquidity funding will be used if there is an event.

32:58 - 33:13

Kaitlyn Kiernan: Thanks so much. So, as I mentioned before, this is a big, lengthy report and there's no way we can cover it all today. But just to wrap up, can you each share one area of the report where you personally would like to encourage our listeners to check it out and take a read? Michael, maybe we can start with you.

33:14 - 33:46

Michael Solomon: Sure. There's lots to read in here. One area that I think would be worthy to focus on is the private placement section. It's not that big, but we are seeing that private placements continue to be increasing in popularity as a product to sell to investors we're often seeing insufficient due diligence, insufficient due diligence files, failure to file Form 5123 and recommending these to less wealthy and less sophisticated investors, which does concern me. So, that's an area I think firms should be focusing on.

33:46 - 33:48

Kaitlyn Kiernan: Thanks. And Ornella?

33:48 - 34:38

Ornella Bergeron: So, I think everybody should check out the entire report. But I guess if I had to highlight one area that we didn't already talk about today, I would say the books and records topic. And it's important not only because it is an area that we spend a lot of time reviewing, but the SEC also adopted amendments to the books and records Rule 17a, the electronic record keeping requirements section of the books and records rule, which is great because it modernizes the electronic record keeping requirements for firms, and it makes the rules adaptable to the new technology electronic recordkeeping. So, the firms that are relying on this rule will need to take some action to file new undertaking letters that include the new language that's required by the rule and the compliance date is May 3rd. So, again, important not only because we do a lot of work, but also because there are some rule changes.

34:39 - 34:46

Kaitlyn Kiernan: Books and records are foundational to a lot of regulation too. So, always important to pay attention. And Bill, how about you?

34:47 - 35:39

Bill St. Louis: So, I'll go back to the section on Best Interest and Form CRS. I just also wanted to highlight for the audience that we continue to see instances where brokers are recommending products that they don't understand. And obviously the duty of care requires reasonable due diligence, skill and care. And if you don't understand core components of the product, that's going to be a Reg BI problem. So, in that regard, something that we've highlighted over the years is that it's critically important that firms ensure their brokers have some training on the products that are being offered and really understand the core components. The first thing we do when we see an issue with a complex product is ask the broker, "Tell me how this product works."

35:40 - 36:14

Kaitlyn Kiernan: Thanks, Bill. Well, that's it for today's episode of FINRA Unscripted. Ornella, Bill and Michael thank you so much for joining me to discuss the 2023 Report on FINRA's Exam and Risk Monitoring Program. Listeners, be sure to go to the show notes or's homepage for a link to this year's report. I'm sure you'll want to start digging in as soon as possible. And if you don't already, be sure to subscribe to FINRA Unscripted wherever you listen to podcasts. And if there are any particular areas of the report you'd like us to explore in more detail in the year ahead, you can email us at [email protected].

36:15 - 36:25

Kaitlyn Kiernan: Today's podcast was produced by me, Kaitlyn Kiernan, coordinated by Hannah Krobock and engineered by John Williams. A special thanks to Meredith Cordisco and Rory Hatfield. Until next time.

36:25 – 36:31

Outro Music

36:31 - 36:58

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