Broker-dealers are subject to examination by the SEC and the SROs. At present, the SEC
are managing to examine 50% of the approximately 4,500 broker-dealers on an annual basis. This level of coverage has afforded the regulators insight into a number of compliance trends.
In its 2015 Exam Priorities letter
, FINRA stated not addressing five specific “challenge areas” can contribute to “compliance and supervisory breakdowns. The areas are:
- Alignment of interests with customers;
- Ethical behavior;
- Supervisory and risk management systems;
- Novel products and services; and
- Management of conflicts.
Additions to the list of exam priorities for 2015 include variable annuities, alternative mutual funds, exchange-traded products tracking alternatively weighted indices, structured retail products, floating rate bank loan funds, and securities-backed lines of credit. Trading will naturally be scrutinized as will private placements, high-risk and recidivist brokers, senior investors, AML and cybersecurity.
With FINRA’s new supervision rules having kicked in late December, examiners will now be reaching out to firms to tackle regulatory questions and to familiarize themselves with how B-Ds are implementing the rule requirements.
Of course, a broker-dealer must permit the SEC to inspect its books and records at any reasonable time.