April 18, 2014

FINRA Issues Annual Regulatory and Examination Priorities Letter for 2013

On January 11, the Financial Industry Regulatory Authority (FINRA) issued its annual letter outlining FINRA’s regulatory and examination priorities for 2013 to FINRA-registered firms. The letter is meant to highlight to FINRA-registered firms’ areas of significance to FINRA’s regulatory programs.

In the letter, FINRA stated that it is focusing its resources on how firms are supervising the development of algorithms and trading systems and the need to have adequate testing and controls related to high-frequency trading and other algorithmic trading strategies and trading systems. Potential areas of review will include, among other things: (i) pre-implementation testing of algorithms and trading systems; (ii) design and development of the firm’s algorithms and trading systems; (iii) procedures and controls to monitor algorithms and trading systems to detect potential trading abuses; (iv) controls with respect to changes made after an algorithm and trading system is placed into production; (v) firmwide disconnect or “kill” switches; and (iv) procedures for responding to widespread system malfunctions. FINRA also remains focused on the proper use of order origin codes across the options industry

In light of the current market environment, FINRA is concerned about sales practice abuses, yield-chasing behaviors and the potential impact of a market correction, external stress event or market dislocation. FINRA is continuing to focus its efforts in areas such as suitability and complex products and firms’ and brokers’ understanding of such products. Among the products FINRA listed in its letter as those on which FINRA will focus its examination efforts include private placement securities, business development companies, leveraged loan products, commercial mortgage-backed securities, high-yield debt instruments, structured products, exchange-traded funds and notes, non-traded REITS, closed-end funds, municipal securities and variable annuities. In addition, FINRA remains concerned about firms’ ability to fund their activities under stress conditions and is focusing its efforts on net capital issues and protection of customer funds and assets.

Click here to read FINRA’s January 11, 2013 Letter.

©2014 Katten Muchin Rosenman LLP

About the Author

Janet M. Angstadt, Securities Attorney, Katten Muchin Law Firm

Janet Angstadt concentrates her practice in financial services. She counsels broker-dealers and market centers on a wide variety of legal and regulatory matters, including mergers and acquisitions involving broker-dealers; exchange, FINRA and SEC investigations; compliance issues related to registrations, sales practice, short sales, Regulation NMS, market making, and options and equities order handling; broker-dealer sponsored alternative trading systems such as dark pools and electronic communication networks; policies and procedures for trading systems development and testing; and...


About the Author

Avi Badash, Katten Muchin Law firm, finance attorney

Avi Badash concentrates his practice in financial services matters.

Prior to joining the firm, Avi was an Associate Director at the Financial Industry Regulatory Authority (FINRA), where he was involved in securities arbitration matters among broker-dealers and between broker-dealers and their customers or registered representatives.

While in law school, Avi was a member of the Cardozo Securities Arbitration Clinic.


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