Regulatory Plans in 2016: Is Your Supervision Solution Up to Snuff?


It shouldn’t come as news that every year the regulatory bodies which govern the financial industry come out with new rules, regulations, and standards by which these financial institutions need adhere.

This year, it seems that a lot of regulatory focus has been on business culture, and business ethics, and with the cases that we’ve seen in the last year, it’s no surprise as to why.

So, what are these changes, and what do they mean for the compliance surveillance space?

Know Your Customer (KYC)

Recently proposed to be added to the regulatory framework of the New York Department of Financial Services, Part 504 outlines the new requirements for transaction monitoring.

“The Department believes that other financial institutions may also have shortcomings in their transaction monitoring programs for monitoring transactions for suspicious activities, and watch list filtering programs, for “real-time” interdiction or stopping of transactions on the basis of watch lists, including OFAC or other sanctions lists, politically exposed persons lists, and internal watch lists.”

From § 504.1 Background

This new regulation requires that financial firms base their transaction monitoring procedures on the risk assessment of the firm. This new piece of legislation calls on institutions to increase the documentation and training around anti-money laundering activities, be more proactive with their transaction monitoring policies, and improve the process by which potential violations and alerts are handled, as a result of these improved monitoring policies.

Business Culture, Conflicts of Interest, and Ethics

In the letter delivered by FINRA at the start of the year, they announced their intention not to dictate the culture of a firm, but to understand the effects that it has on its compliance and risk management practices.

By assessing the value of control functions in an organization, the tolerance level when a policy or procedure is breached, whether the firm takes a proactive approach in assessing risk, if supervisors are effective role models of firm culture, and how subcultures that don’t conform to the general culture are handled, FINRA plans to evaluate how effective a firm is at ensuring their compliance with regulations, how likely an infraction is, and whether a firm is doing all that they can to prevent these infractions.

This new initiative means that now, more than ever, it’s imperative that compliance departments take a more proactive approach identifying, and subsequently developing measures to hedge against, various risks.

Supervision, Risk Management and Controls


As part of the aforementioned initiative, FINRA plans on evaluating several areas with which there’s been repeated concern.

To ensure proper business ethics and the integrity of markets, the evaluation of risk management will focus on:

  • A firm’s management of conflicts of interest including Incentive Structures, Investment Banking and Research Business Lines, Information Leakage, and Position Valuation
  • The technology used to supervise and report various activity, Cybersecurity defenses, Technology Management, and overall Data Quality and Governance.
  • What, if any essential functions are being outsources, and how they’re being handled.
  • The preventative measures in place in regards to anti-money laundering including the monitoring of suspicious activity, specifically with an emphasis on Microcap Securities.

Proposed Rule 2273


Proposed to the Security Exchange Commission in mid-December, Rule 2273 will “establish an obligation to deliver an educational communication in connection with member recruitment practices and account transfers.”

When a representative moves from one firm to another, often times they will reach out to former customers asking them to bring their accounts to their new firm. The proposed rule will require that, before the customer moves their account(s) over, the representative has to provide them with an “educational communication” essentially outlining key considerations, should they decide to transfer their accounts, and maintain their relationship with that specific representative, at the new firm.



It’s become apparent in recent years that the failure to properly manage liquidity has played a key role in, not just the failures of individual firms, but systemic crises. Because of that, FINRA has taken special interest in firms’ practices, with respect to manage funding and liquidity risk.

2016 ushers in a renewed FINRA initiative to review the adequacy of the contingency funding plans that are in place at firms, in light of their business models.

Outlined in regulatory notice 15-33, are  the FINRA guidelines that they’ve determined to be sound practices. Stressing the importance of liquidity management from an investor’s perspective, the notice is directed to firms that hold inventory positions or clear and carry customer transactions.

Sales Practice


While the general rules of Suitability are outlined in FINRA Rule 2111 , FINRA intends to focus on firms that do not provide an adequate method by which customers are able to understand the risks, rewards, or inherent nature of the recommendations that are being suggested by brokers. This includes initiating a closer look at the product review committees and training programs to educate registered representatives and supervisors about the related products.

Under the “sales practices” umbrella, the vulnerability of certain investors such as seniors or unknowledgeable investors, has been an area of steadily increasing focus throughout the years. It’s FINRA’s intention that firms, and their brokers, are making recommendations that are in the best interests of their customers, rather than what will promote the biggest gain for the firm or the individual.

This means that with communication surveillance, ideally FINRA is looking for the monitoring of recommendation language, which is done by many of the policies which we’ve designed and created.

Market Integrity


First looking at the Vendor Display Rule, FINRA issued Notice 15-52 to outline the obligations that representatives have about (or regarding) providing quotation information to customers. Firms, under this rule, are expected to provide a consolidated display of market data when they are providing quotation information to customers.

Second, in this area, focus on the potential for market manipulation is going to become prevalent due to many of the cases that have occurred where collusive parties have manipulated certain market exchange rates for their own advantage.

While there should already be surveillance policies in place at firms (with the intention to monitor and to proactively hedge against these potential violations) these policies will soon become required by FINRA.



While this is not meant to be used as a comprehensive list of areas that FINRA is going to be focusing on in the coming year (The full text of the letter can be viewed here), this is meant to give a general idea of what they’re going to be looking at from a compliance surveillance perspective.

Adjusting, updating, and instituting preventative measures to your communications surveillance solution now, may prevent your firm from getting penalized later on when FINRA decides to come through.

And if creating all of these policies sounds like a daunting task, don’t worry. We can give you a hand.