2023 Report on FINRA's Examination and Risk Monitoring Program

The 2023 Report on FINRA’s Examination and Risk Monitoring Program provides a great level of insight into findings from the recent oversight activities of FINRA’s Member Supervision, Market Regulation and Enforcement programmes. The report is intended to be an information source the financial industry can use to strengthen compliance programs. The 2023 report addresses a materially broader range of topics compared to previous years. It also introduces a new Financial Crimes section, focusing on Anti-Money Laundering (AML), Fraud and Sanctions
and Manipulative Trading.

We have compiled a matrix detailing the benefits of our coverage alongside FINRA'S key findings - access the report here.

• The report highlights the importance of monitoring transactions in cross-product securities that manipulate the price of an underlying security. Given the vast range of fixed income instruments which share risk sensitivities, there is a clear benefit to a self-calibrating tool such as MAST.
• The report is aligned to guidance provided by other regulators around the world, focusing on fixed income surveillance, specifically the fair pricing obligations which apply to fixed income instruments. Recent examples include the FCA’s Market Watch 56 and the AMF’s enforcement action for ramping in European bonds.
• The report notes that firms are required to establish an Anti-Money Laundering Compliance Program which is reasonably designed to achieve and monitor the firm’s compliance with the Bank Secrecy Act (BSA). This includes ensuring there is a review for and response to red flags associated with securities trading (including order entry).
• The report also recognised the widespread adoption of cloud computing within the securities industry.

The addition to this year’s report of a new ‘Financial Crimes’ section comprising three topics highlights the growing importance to FINRA of safeguarding market integrity. In keeping with this theme, TradingHub has identified four key sections from the report:

• Manipulative Trading
• Anti-Money Laundering, Fraud and Sanctions
• Fixed Income – Fair Pricing
• Best Execution
  
  

Manipulative Trading

Manipulative trading is a new addition to the 2023 report and reflects FINRA’s concern for market integrity. In particular, the report flags the need for firms to have a trade surveillance programme in place that meets several diverse requirements. These include ensuring surveillance systems monitor for patterns of suspicious order entries and trading activity, as well as a surveillance system which can identify trading that appears to lack legitimate economic sense. Furthermore, the surveillance system needs to support the detection of manipulative schemes involving cross-platform and product activity.

Anti-Money Laundering, Fraud and Sanctions

The report highlights the importance of conducting formal, written AML risk assessments that are part of a broader set of AML procedures. Alongside policies, these procedures must be regularly updated following independent AML audits or regulatory updates from the SEC, FinCEN or FINRA. Establishing a competent Customer Identification Programme (CIP) is seen as a key part of an effective AML programme. 

Fixed Income - Fair Pricing

FINRA reiterates the need for firms to have a reasonable supervisory system that complies with the fair pricing rules for fixed income securities. These rules aim to prevent excessive mark-ups or mark-downs. FINRA expects firms to periodically review these supervisory procedures and tailor them to different fixed income products given their different characteristics. 

Best Execution

FINRA rules require each member firm to find the best market to buy/sell a security on behalf of a customer to ensure the price is as favourable as possible. Execution quality reviews, ideally chaired by Best Execution Committees, should be ‘regular and rigorous’, as well as risk-based.

We have compiled a matrix detailing the benefits of our coverage alongside FINRA'S key findings. Please fill in the details below to access the report.