As the investment industry evolves, so do the compliance risks that firms are facing, as highlighted in a new report from the U.S. Financial Industry Regulatory Authority Inc. (FINRA).
The U.S. self-regulatory organization’s annual oversight report sets out the findings from compliance reviews and trends the regulator has observed, and details some of the new risks as well as existing compliance challenges.
The SRO highlighted the emergence of crypto-related compliance risks, the threat posed by the growing use of artificial intelligence (AI), and the prevalence of “new account” fraud.
FINRA said it has observed an increase in fraudsters using stolen or faked identity information to open brokerage accounts, which are then used to steal securities, money and other assets, or to launder the proceeds of other frauds.
The report noted that the increased use of mobile apps and online services “has decreased human interaction between prospective customers and firms, creating the potential for bad actors to fraudulently open brokerage accounts with greater ease.”
The SRO called on firms to review the red flags they use to spot these frauds, to evaluate their account monitoring systems, and to bolster oversight procedures.
At the same time, the report indicated the compliance issues related to AI.
“The use of AI tools could implicate virtually every aspect of a member firm’s regulatory obligations, and firms should consider these broad implications before deploying such technologies,” the report said.
Additionally, the SRO noted that fraudsters are “taking advantage of investor interest in crypto assets and blockchain technology” by carrying out conventional market manipulation schemes such as pump and dumps in the crypto sector, and exploiting vulnerabilities stemming from the crypto sector’s decentralized, 24/7 trading structure.
“These manipulative schemes may also be amplified by social media promotions, including those that suddenly and frequently appear across social media platforms, contain unverifiable information or both,” it said.
Other new areas highlighted in the report include risks posed by over-the-counter (OTC) fixed income securities, firms reporting inflated trading volumes, and compliance with the market access rules.
Long-standing concerns include firms’ compliance with best interest conduct standards, anti-money laundering rules, and consolidated audit trail requirements. Cybersecurity is also an ever-growing issue.
“FINRA has observed an increase in the variety, frequency and sophistication of certain cybersecurity incidents, including the establishment of imposter websites, insider threats, ransomware and cybersecurity events at critical vendors,” the SRO said in the report.
The report is intended to be used by industry firms to help bolster their compliance programs and guard against new and existing threats.