Securities Litigation

FINRA released its annual Regulatory and Examination Priorities Letter (so-called "Errico Letter") on January 5. FINRA's top five priorities:

1. Firm Culture. FINRA's been pushing "culture of compliance" for years, but in 2016 will take it to the next level: "FINRA will formalize our assessment of firm culture while continuing our focus on conflicts of interest and ethics." In looking at a firm's culture, FINRA will focus on "Five Factors" to assess whether:

• policy or control breaches are tolerated;
• control functions are valued within the organization;
• managers are effective role models of firm culture;
• the organization proactively seeks to identify risk and compliance events; and
• non-conforming sub-cultures are identified and addressed.

2. Conflicts of Interest. FINRA's been ramping up its emphasis on conflicts management, and five types of conflicts occupy this top-tier concern:

• Incentive structures, including recruiting and the educational disclosures § under Proposed Rule 2273;
• Banking;
• Research:
• "Information Leakage," for example between retail customer information and proprietary trading;
• Position Valuation: as at issue in risk management (e.g. London Whale) or vis customer positions (e.g. The Big Short)

3. Technology. Cyber-security tops this list, of course, but FINRA also will look at Technology Management (where unruly algorithms or software up-grade glitches to legacy systems have wreaked havoc) and Data Integrity.
4. Outsourcing. As efficiency continues to propel outsourcing, FINRA wants to ensure that member firms continue to exercise downstream control and understand that you outsource operations but never responsibility.
5. AML. Always a focus, globalization and increasing terror concerns highlight suspicious activity reporting and the back-door AML risks of micro-cap securities.

Among the also-rans, industry participants will recognize many perennial favorites, including: Suitability (especially structured and complex products, non-traditional ETPs and SBLOCs); Product Review; Concentration; Seniors; Discounts and Breakpoints; 529 Plans; Private Placements and Outside Business Activities. Look for additional attention to Market Access issues, Market Manipulation (across markets or products), Fixed Income (in conjunction with the MSRB's renewed vigor) and Audit Integrity. The Priorities Letter is here.

Thomas K. Potter, III (tpotter@burr.com) is a partner in the Securities Litigation Practice Group at Burr & Forman, LLP. Tom is licensed in Tennessee, Texas and Louisiana. He has over 29 years' experience representing financial institutions in litigation, regulatory and compliance matters. See attorney profile. © 2016 by Thomas K. Potter, III (all rights reserved).