FINRA management came up with 20 top priorities for its 2011 schedule of examination priorities.  Firms that engage any of the prioritized activities should consider assessing their internal controls, supervisory systems and risk management practices as soon as practicable. 

Firms will be expected to have their pols and procedures in tip-top shape by the time FINRA examiners walk through the door.  Any deficiencies are likely to result in monetary sanctions both to the firm and its managing principals.

• For complete details, go to:   [FINRA 2011 Priorities, 2/8]. 
• Here are Priorities #1 - 7:

1.  Fraud Detection  ...  2. Fraudulent Activity Associated With Customer Accounts  ...  3. High-Frequency Trading, Algorithms, Sponsored Access, Direct Market Access and Trading Pauses  ...  4. Short Sales and Regulation SHO  ...  5. Information Barriers  ...  6.  Private Placements and Private Self-Offerings  ...  7. Trading in Non-Public Securities.

    1.  Fraud Detection.  FINRA’s regulatory programs emphasize the detection of fraud and other egregious misconduct.  FINRA examiners are trained to spot and investigate red flags that may indicate fraudulent behavior.  Examiners also will spend time gaining a thorough understanding of affiliate activity, how it interacts with B/D business and any conflicts of interest it may pose.  FINRA Rule 4160, which became effective 2/1/11, it strengthens FINRA’s ability to verify independently customer and proprietary assets maintained by a member firm at a non-member financial institution.  (See RegNote 10-61)

    2.  Fraudulent Activity Associated With Customer Accounts.  Firms must supervise their associated persons as well as be vigilant regarding their customers.  Customer-initiated schemes can expose firms to regulatory, operational and reputational risk.  Firm supervisory systems and AML monitoring systems are key for detecting and reporting suspicious transactions.

    3.  High-Frequency Trading, Algorithms, Sponsored Access, Direct Market Access and Trading Pauses.  Market events such as the May 6the “Flash Crash” and the predominance of high-frequency trading (HFT) and algorithmic trading in today’s highly automated equities markets place a heightened focus on member firms’ efforts to establish effective controls over electronic order routing and market access arrangements, including surveillance of algorithmic trading and HFT strategies.  On 11/3/10, the SEC Rule 15c3-5 was adopted re: risk management controls for brokers or dealers with market access.  The rule became effective on 1/14.11, although firms have until 7/14/11 to comply.  See Regulatory Notices 10-30 and 10-43.

    4.  Short Sales and Regulation SHO.  Short sale compliance remains a hot topic, including locate responsibilities.  In a recent enforcement matter, firms implemented Direct Market Access trading systems for their customers that were designed to block the execution of short sale orders unless a “locate” had been obtained and documented.  FINRA found that the firm disabled this system in certain instances and its clearing firm created a separate system for certain customers.  In both instances, the systems no longer blocked some short sale orders that did not have valid, associated locates.  Amendments to Reg. SHO become effective 2/28/11.  (See RegNote 10-48)

    5.  Information Barriers.  FINRA remains concerned about weak information barrier controls around the flow of material, non-public information within the firm and with its affiliates, clients and others that are intended to prevent insider trading, front running or other misuse of material and non-public information. Proposed FINRA Rule 5320 addresses the protection of customer limit and market orders, and it codifies and expands “no knowledge” exceptions to these protection rules in line with similar exceptions in NYSE Rule 92.

    6.  Private Placements and Private Self-Offerings.  FINRA remains concerned about weak information barrier controls around the flow of material, non-public information within the firm and with its affiliates, clients and others that are intended to prevent insider trading, front running or other misuse of material and non-public information. Proposed FINRA Rule 5320 addresses the protection of customer limit and market orders, and it codifies and expands “no knowledge” exceptions to these protection rules in line with similar exceptions in NYSE Rule 92.  See Regulatory Notice 11-04.

    7.  Trading in Non-Public Securities.  FINRA has closely followed trends regarding trading in the unregistered shares of companies that report no public information. Some of the private firms whose securities have been “trading” in this market are well known to the general public.