News & Insights

Highlights From The Finra 2021 Risk Monitoring And Examination Priorities Letter

On February 1, 2021, FINRA published the 2021 Report on FINRA’s Examination and Risk Monitoring Program (“2021 Report”). Annually, FINRA publishes the Report on its Examination and Risk Monitoring Program in order to provide member firms with information they can use to assess and strengthen their compliance, supervisory, and risk management programs. The Report summarizes noteworthy findings from recent examinations, outlines effective practices that FINRA observed during its oversight, and provides additional resources that may be helpful to member firms in fulfilling their compliance obligations.

The 2021 Report addressed several regulatory topics ranging from Firm Operations to Financial Management. However, the following two highlights mentioned in the 2021 Report, should be of noted importance to our broker-dealer clients: 1) Regulation Best Interest; and 2) Variable Annuities.

Regulation Best Interest. Regulation Best Interest (or Reg BI) requires broker-dealers (and natural persons associated with broker-dealers) to act in the best interest of their retail customers in making a recommendation of any securities transaction or investment strategy involving securities. In the 2021 Report, FINRA mentioned that it will continue to focus on assessing whether member firms have established and implemented policies, procedures, and a system of supervision reasonably designed to comply with Reg BI. Specifically, in 2021, FINRA intends to expand the scope of their Reg BI reviews and testing to effect a more comprehensive review of firm processes, practices and conduct.

Variable Annuities. Within the past few years, FINRA has fined several member firms based on the recommendation of certain variable annuities to their clients. Today, FINRA continues to evaluate variable annuity exchanges under FINRA Rule 2330 (Members’ Responsibilities Regarding Deferred Variable Annuities) and, when applicable, under Reg BI. Additionally, in early 2020, FINRA engaged in an informal review of buyout written supervisory procedures (WSPs), training, and disclosures for member firms. FINRA is expecting WSPs and training to include specific provisions for monitoring and recommendations made to customers who have been presented with a buyout opportunity.  They expect principal pre-approval and in some cases second level approach for buyout offers.  These should be a holistic review of all benefits under the correct contract including loss of benefits, riders, surrender values, etc.

We recommend that our broker-dealer clients review the FINRA Priorities Letter in detail.  FINRA’s discussion of new areas of focus in the Letter should serve as a useful resource in reviewing compliance and supervisory programs throughout the year.