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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.