brokers-pay-heed-or-watch-out

FINRA Shows Regulatory Hand: Brokers, Pay Heed or Watch Out!

One of the benefits of working in financial services is that regulatory agencies are usually transparent about their concerns. They communicate well in advance when they’re about to crack down on something, giving agents, advisors, and brokers more than enough time to respond. FINRA is an excellent case in point.

In early January 2018, the securities self-regulatory organization released its annual Regulatory and Examination Priorities Letter, which tells member firms and registered representatives what it intends to focus on during the year. The letter, in effect, is a great resource for resolving compliance issues before FINRA gets involved.  It also helps firm executives prepare for their FINRA examinations.

The regulator’s 2018 letter was wide-ranging. FINRA announced it will focus its efforts on fraud, high-risk firms and brokers, and operational and financial risks, including technology governance, cybersecurity, and market regulations. Other priorities will include:

  • Sales practice risks, especially recommendations of complex products to unsophisticated, vulnerable investors;
  • Protection of customer assets and the accuracy of firm’s financial data; and
  • Market integrity, including best execution, manipulation across markets and products, and fixed-income data integrity.

In the body of the letter, FINRA provided further details on each regulatory concern. Several that bear a strong relationship to broker sales activities follow.

Fraud: FINRA announced that once again, fraud will be a high enforcement priority. These include activities such as insider trading, microcap pump-and-dump schemes, issuer fraud, and Ponzi-type schemes. Also, a focus will be continuing to identify cases of potential insider trading, which FINRA refers to the U.S. Securities and Exchange Commissions (SEC). Reining in scams targeting senior investors will receive a strong emphasis, as well.

High-Risk Firms and Brokers: FINRA will focus on protecting investors from firms and brokers that take advantage of their customers. Specifically, it will look at practices such as hiring, supervision of high-risk brokers, supervision of point-of-sale activities, and branch inspection programs. Also a focus will be sales of advanced securities products to unsophisticated investors.

Sales Practice Risks: This is an especially wide-ranging area. In 2018, FINRA says it will pay serious attention to suitability violations, especially to the business practices and processes that produce suitable sales. Suitability in the context of employer-sponsored retirement plans and IRA rollovers will be hot-button issues too, as will be sales of initial coin offerings, cryptocurrencies, the use of margin loans in the sales process, and proper use of securities-backed lines of credit.

Cybersecurity: 2018 will continue to see high FINRA involvement in protecting customer assets and information against hacking and other cyber-crimes. As in prior years, FINRA will continue to evaluate the effectiveness of firms’ cybersecurity protocols—specifically their preparedness, technical defenses, and resiliency measures.

To further help member firms and their brokers, FINRA released a Report on FINRA Examination Findings. Based on what it finds when it visits firms at least once every four years, this document can also be a helpful resource in assuring firm compliance with FINRA rules in 2018 and beyond.

For further information about FINRA’s 2018 priorities, please visit its website here.

Continue to keep up to date with ethical practices by reading the latest news on  National Ethics AssociationFor information on affordable E&O insurance for low-risk insurance agents, investment advisors, and real estate broker/owners, please visit EOforLess.com.