As a reminder, FINRA's Examination team conducts a core function of the regulator’s business by examining every member firm at least every four years and as often as annually, based on the firm’s risk profile.
Noteworthy findings that FINRA has noted at some, but not all, member firms, include:
- Certain topics such as Cybersecurity, Liquidity Management and Credit Risk
- Regulation BI and Form CRS
- Trusted Contact Persons
- Books and Records
- Outside Business Activities
- Anti-Money Laundering, Fraud and Sanctions
- Cybersecurity and Technology Governance
- Private Placements Communications and Sales
- Best Execution
These exams ensure firms remain in compliance with FINRA Rules and federal securities laws and regulations. Key highlights and considerations for member firms’ compliance programs related to Regulation and Form CRS are summarized below:
Form CRS Guidance
- Deficient Form CRS Filings: Firms’ Form CRS filings significantly departing from the Form CRS instructions or SEC guidance by:
- exceeding prescribed page lengths;
- omitting material facts (e.g., description of services offered, limitations of the firm’s investment services, incomplete or inaccurate cost disclosures);
- inaccurately representing the firm’s or its financial professionals’ disciplinary histories, including inappropriate qualifying language to explain disciplinary history;
- failing to describe types of compensation and compensation-related conflicts;
- incorrectly stating that the firm does not provide recommendations;
- changing or excluding language required by Form CRS; and
- not resembling a relationship summary, as required by Form CRS.
- Failing to Properly Deliver Form CRS: Failing to deliver or not creating a record of the date on which your firm provided each Form CRS to each retail investor, including any Form CRS provided before such retail investor opened an account.
- Failing to Properly Post Form CRS: For firms that have a public website, failing to post or failing to post prominently, in a location and format that is easily accessible to retail investors, the current Form CRS (e.g., requiring multiple click-throughs or using confusing descriptions to navigate to the Form CRS).
- Failing to Adequately Amend Form CRS: Firms not in compliance with Form CRS in relation to material changes because they:
- failed to timely re-file in CRD (i.e., within 30 days of the date when Form CRS became materially inaccurate); or
- failed to communicate or timely communicate changes to existing retail investor customers (e.g., amended summary, required exhibits, shoring revised text or summarizing material changes or communicating the information through another disclosure within 60 days after the updates are required to be made, 90 days total from teh date when Form CRS became materially inaccurate)
- Misconstruing Obligation to File and Deliver Form CRS
- Incorrectly assuming that the requirement to file and deliver a Form CRS hinges solely on making recommendations, rather than also when placing an order or opening a brokerage account for a retail investor.
- Incorrectly assuming a firm is not subject to the Form CRS delivery obligation because of, among other things, their customer base (e.g., retail investors who are high-net-worth individuals) or the services they offer (e.g., selling investment company products held directly by an issuer, self-directed accounts).
RegComp Financial is a leading national compliance consulting firm with offices in Texas and Florida. To read more about RegComp Financial and its services related to broker dealer compliance, please visit https://www.regcompfinancial.com or call (713) 565-8733.
