FINRA continues to be concerned about offering interest rate-sensitive products in the current low interest rate environment and the effects of potential changes in interest rates. In 2015, FINRA examiners will look for concentrated positions in products that are highly sensitive to interest rates, such as long duration fixed income securities, high yield bonds, mortgage-backed securities, or bond funds composed of interest rate-sensitive securities, and test for suitability and adequate disclosures, as well as firms' efforts to educate registered representatives and customers about these products.

Examinations will include assessments of compensation structures that may improperly incent the sale of variable annuities, the suitability of recommendations, statements made by registered representatives about these products and the adequacy of disclosures made about material features of variable annuities. They also will review training and whether communications concerning these products are being properly filed with FINRA under FINRA Rule 2210.

Alternative mutual funds are often marketed as a way for retail customers to invest in sophisticated, actively-managed hedge fund-like strategies. FINRA recommends that firms refer to these funds based on their specific strategies, as opposed to bundling them under one umbrella category. FINRA is concerned that registered representatives and customers will not understand how the funds will respond to various market conditions or the strategy in which the fund's adviser will engage in various market scenarios. Broker-dealers must ensure that their communications accurately and fairly describe how the products work, and that their descriptions of the funds are consistent with the representations in the funds' prospectuses.

FINRA continues to be concerned with general lack of liquidity, high fees and valuation difficulty for these products. These risks remain relevant with respect to customer-specific suitability obligations that firms must perform when recommending non-traded REITs to clients. FINRA also emphasizes that firms should perform due diligence on an ongoing basis on REITs they allow their representatives to recommend. It notes that NASD Rule 2340 (Customer Account Statements) has been amended to require broker-dealers to provide a more accurate per share estimated value on customer account statements, as well as additional disclosures, on this product.

Indexing products have expanded beyond traditional market capitalization-weighted methods to alternatively weighted strategies to provide exposure to specific investment risk factors or strategies. FINRA is concerned that ETPs tracking these indices may be thinly traded and have wide bid-ask spreads, making these funds more costly to trade, in addition to their generally higher expenses. Some alternatively weighted indices may have significantly higher turnover than more traditional indices, leading to greater transaction costs for ETPs that track them. It is unclear how these products will behave in different market environments going forward.

SRPs, including structured notes, have complex payout structures and use proprietary indices as reference assets. FINRA is concerned that some brokers and retail investors may not be familiar with the complexities of SRPs, compounded by the uncertain impact of a changing interest rate environment. FINRA will focus on the incentive to increase revenue from structured product sales through distribution channels that may not have adequate controls to determine customer suitability, especially when distributed through affiliated wholesalers.

Retail investors have increased their exposure to these products through mutual funds, closed-end funds and exchange-traded funds (ETFs) in an effort to protect against the threat of rising interest rates. These products can carry significant credit and call risk. In addition, they are difficult to value, have longer settlement times than other investments and are relatively illiquid. Funds investing in these loans could face liquidity problems if a significant number of investors make redemption requests at the same time.

SBLOCs are revolving, non-purpose loans that allow investors to borrow money from lending institutions using fully paid-for securities held in their brokerage accounts as collateral. Broker-dealers offering SBLOCs should have proper controls in place to supervise these programs. Customers should be fully apprised of program features, including loan restrictions and how changing market conditions may affect their brokerage account and their ability to draw on the SBLOC. Firms should have operational procedures that enable them to interact with the lending institution to monitor the customer's account, keep adequate records and ensure that customers are promptly notified when collateral shortfalls occur.

FINRA will examine firms for the integrity of mark-to-market prices and for supervisory controls surrounding the overall valuation process, particularly with respect to infrequently traded positions in corporate, asset-backed and municipal debt securities.

Examiners will review situations where firms that sell tax-exempt or FDIC insured institution instruments, such as certificates of deposits, may cause their customers to lose the tax exempt status of interest payments or FDIC deposit protection status through the firms' holding of short positions in such instruments.

FINRA examiners will review firms' approaches to cybersecurity risk management, including their governance structures and processes for conducting risk assessments and addressing the output of those assessments. In addition, examiners will review firms' approaches to ensuring compliance with the electronic storage requirements concerning records maintained under SEC Rule 17a-4(f) in the event of a cyber attack.

Outsourcing of key operational functions will be a priority area of review during 2015 examinations, and will include an analysis of the due diligence and risk assessment firms perform on potential providers, as well as the supervision they implement for the outsourced activities and functions.

Examiners will review whether required disclosures on Form U-4 and Form U-5 concerning reportable events such as regulatory actions, customer complaints, bankruptcy filings, liens, judgments and criminal charges are complete, accurate and made within the required time periods. They also will determine whether firms have controls, processes and procedures in place to ensure timely filings and determine whether public records reviews are occurring.

FINRA examination teams will review firms' technology and related controls on electronic trading systems with an emphasis on the development and ongoing supervision of algorithms and the development and testing of technology changes. Examiners will also focus on firms' risk management and financial and operational controls, with a focus on risks of high speed trading to the firms' net capital.

FINRA will continue to pursue firms whose traders or customers use algorithms to manipulate the markets, including through layering, spoofing, wash sales and marking the close, among other means. FINRA will also continue to review whether firms' supervisory and other controls fail to appropriately detect abusive activity by the firm's traders or its customers.

FINRA will continue to enhance both its equities and options cross-market surveillance patterns to assist it in identifying potentially manipulative activity by single market participants on either a single or multiple markets including activity involving two or more market participants apparently acting in concert through one or more markets.

FINRA will continue to assess whether trading-fee rebates create conflicts of interest that compromise the execution quality of customer orders and result in inferior executions. It also will examine the routing practices of options floor brokers and whether they are meeting their best execution obligations. In the area of fixed income, FINRA will increase its review of firms' pricing practices and their controls in avoiding excessive mark-ups and mark-downs. They also will look at disclosure of fees to their customers and the impact of alternative trading systems on these markets.

FINRA will continue to assess broker-dealer controls under the SEC Market Access Rule 15c3-5 with respect to detecting and preventing manipulative trading activity and rule violations.

FINRA will continue to focus on late reporting in TRACE-eligible and municipal securities that appears to result from inadequate processes and procedures on trading desks. FINRA has created a new team to focus on identifying potential equity audit trail issues to assist in resolving reporting errors promptly to improve the accuracy of trading data for surveillance purposes.