FINRA’s 2023 Report provides member firms with key insights into findings from recent oversight activities, as well as observations into its Member Supervision, Market Regulation and Enforcement programs (collectively, regulatory operations programs). The regulator said its report reflects a commitment to providing greater transparency to member firms and the public about its activities.
The report builds on the structure and content covered in 2021 and 2021. It addresses 24 topics, with the following new additions in 2023:
- Manipulative Trading: Findings include inadequate written supervisory procedures, non-specific surveillance thresholds and surveillance deficiencies.
- Fixed Income – Fair Pricing: Among the findings are incorrect determination of prevailing market price, outdated mark-up/mark-down grids, failure to consider the impact of mark-up on yield to maturity and unreasonable supervision.
- Fractional Shares: Reporting failures and inadequate supervisory systems and procedures are among the findings.
- Regulation SHO: This section includes findings on non-bona fide market making and impermissible reuse of locates.
“The report addresses topics that remain perennially important, with updates to reflect evolving risks, industry trends and findings from FINRA’s recent oversight activities.”
Greg Ruppert, Executive Vice President of Member Supervision, FINRA
“This report represents a holistic approach to FINRA regulation, leveraging information from across our regulatory operations to provide member firms with information to help them enhance their core compliance programs,” said Greg Ruppert, Executive Vice President of Member Supervision, FINRA.
“The report addresses topics that remain perennially important, with updates to reflect evolving risks, industry trends and findings from FINRA’s recent oversight activities. This year, we have also increased the breadth of the report’s coverage by adding several new topics focused on insights originating in our market surveillance activities.”
Emerging Risk Area: Manipulative Trading in Small Cap IPOs
- FINRA, NASDAQ and NYSE have recently observed that initial public offerings (IPOs) for certain small cap, exchange-listed issuers may be the subject of market manipulation schemes, similar to so-called “ramp and dump” schemes.
- FINRA has observed significant unexplained price increases on the day of, or shortly after the IPO of, certain small cap issuers. These price increases appear to be associated with trading by apparent nominee accounts that invest in the small cap IPO and subsequently engage in apparent manipulative orders and trading activity.
- Some of the victims of ramp and dump schemes appear to be victims of social media scams such as “pig butchering,” a scheme previously associated with fraudulent crypto-related investment schemes.
- FINRA encourages firms to review Regulatory Notice 22-25 (Heightened Threat of Fraud: FINRA Alerts Firms to Recent Trend in Small Capitalization (Small Cap) IPOs) for potential indicators of these schemes and to evaluate their compliance and risk management programs to confirm that they are monitoring for and addressing this threat. Additional findings and effective practices related to this topic can be found in the 2023 Report’s Manipulative Trading section.
The report introduces a new Financial Crimes section, consisting of three topics — Cybersecurity and Technological Governance, Anti Money Laundering, Fraud and Sanctions, and Manipulative Trading. This highlights FINRA’s increased focus on protecting investors and safeguarding market integrity against these ongoing threats.
Anti-Money Laundering Act of 2020
On January 1, 2021, Congress passed the FY2021 National Defense Authorization Act (NDAA), which included the Anti-Money Laundering Act of 2020 (AML Act) and, within the AML Act, the Corporate Transparency Act (CTA). Many provisions of the AML Act and the CTA require rulemaking or periodic reporting to Congress on implementation efforts, assessments and findings. Firms should stay apprised of progress being made to implement the AML Act.
Other Key Topics Include:
- Cybersecurity: Cyber security threats continue to be one of the most significant risks facing many customers and firms. The frequency, sophistication and variety of attacks continue to increase. The report discusses FINRA’s significant focus on cybersecurity, including the establishment of the Cyber and Analytics Unit to enhance the ability to proactively address the increasingly sophisticated cyber threat landscape, the impact of cyber-enabled fraud activity including on investors in the crypto-asset market, and FINRA’s increased outreach to firms to make them aware of cyber security threats.
- Complex Products: As discussed in the report, FINRA will continue to review firms’ communications and disclosures to customers relating to complex products. FINRA will also review customer account activity to assess whether firms’ recommendations regarding these products are in the best interest of retail customers given their investment profiles and the potential risks, rewards and costs associated with the recommendations.
- Regulation Best Interest (Reg BI) and Form CRS: To provide firms with more information regarding these regulations, the report sets forth updated observations of FINRA’s review of firms’ compliance with Reg BI and Form CRS. These include observations relating to firms’ 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; and filing, delivering and tracking an accurate Form CRS.
- Mobile Apps: As the use of mobile apps becomes increasingly widespread, the risks posed by them become more significant. The report discusses FINRA’s observations of potential issues with some mobile apps, including apps that do not adequately distinguish between products and services of the broker-dealer and those of affiliates or third parties (such as transactions involving crypto assets). It also touches on mobile apps’ disclosures and explanations of higher-risk products or services, such as certain options and margin lending activities.