8 ways FINRA will tighten the regulatory screws this year
January 9, 2017 1:17 PM
The future of the fiduciary rule may be uncertain — but that doesn’t mean firms and advisers can expect the regulatory tide to recede anytime soon. Additionally, it isn't the only regulatory change to which the industry needs to pay attention.
In its annual letter, FINRA identified a number of areas where it will be ramping up scrutiny, from product suitability to cybersecurity. Here's a breakdown of the most important changes for advisers and firms. -- Andrew Welsch & Maddy Perkins
In its annual letter, FINRA identified a number of areas where it will be ramping up scrutiny, from product suitability to cybersecurity. Here's a breakdown of the most important changes for advisers and firms. -- Andrew Welsch & Maddy Perkins
Rogue brokers
FINRA plans new measures to crack down on rogue brokers and other rule-breakers. The regulator says it will "devote particular attention" to firms' hiring and supervisory practices, and create an examination unit dedicated to identifying bad brokers.
Firms that hire large numbers of brokers with disciplinary records will come under additional scrutiny. Furthermore, FINRA says it will pay close attention to how firms supervise branches, and particularly independent advisers.
Firms that hire large numbers of brokers with disciplinary records will come under additional scrutiny. Furthermore, FINRA says it will pay close attention to how firms supervise branches, and particularly independent advisers.
Protecting the vulnerable
Elderly clients have increasingly become targets for fraud and other financial wrongdoing. In response, FINRA says it will further increase protections for senior investors, with a particular focus on the suitability of recommended products. FINRA says there has been an uptick in questionable or inappropriate behavior.
"We are seeing numerous cases where registered representatives have recommended that senior investors purchase speculative or complex products in search of yield. While the quest for higher yield is not per se problematic, FINRA will assess whether such recommendations were suitable given an investor’s profile and risk tolerance, and whether firms have appropriate supervisory mechanisms in place to detect and prevent problematic sales practices."
"We are seeing numerous cases where registered representatives have recommended that senior investors purchase speculative or complex products in search of yield. While the quest for higher yield is not per se problematic, FINRA will assess whether such recommendations were suitable given an investor’s profile and risk tolerance, and whether firms have appropriate supervisory mechanisms in place to detect and prevent problematic sales practices."
But is it suitable?
The regulator says it is also concerned with how firms and advisers determine whether a product is suitable for a particular client.
"FINRA continues to observe instances where firms recommend products that are unsuitable for customers, including situations where customers and sometimes registered representatives do not understand important product features," the regulator says.
In particular, FINRA will take a close look at complex products and how shifting interest rates affect investment recommendations.
"FINRA continues to observe instances where firms recommend products that are unsuitable for customers, including situations where customers and sometimes registered representatives do not understand important product features," the regulator says.
In particular, FINRA will take a close look at complex products and how shifting interest rates affect investment recommendations.
Excessive trading
In addition to the suitability of products, the regulator also plans to look closely at how firms supervise the trading of long-term products. FINRA says it has noted instances of advisers recommending clients trade long-term products on a short-term basis, potentially to the clients' detriment.
Some advisers can expect their firms to tweak their compliance strategies. In its letter, FINRA urged "firms to evaluate whether their supervisory systems can detect activity intended to evade automated surveillance for excessive switching activity."
Some advisers can expect their firms to tweak their compliance strategies. In its letter, FINRA urged "firms to evaluate whether their supervisory systems can detect activity intended to evade automated surveillance for excessive switching activity."
Don't quit your day job
Advisers with business interests outside the firm had best be prepared for heightened scrutiny. FINRA says it plans to evaluate how planners are notifying firms of such activities, and how firms are keeping tabs on their advisers.
Michael Nagle/Bloomberg
Record and review all electronic communications
FINRA says it is committed to assuring all social media posts and electronic communications are up to snuff when it comes to business conduct. It will carefully monitor firms' compliance with supervising advisers' social media and email usage as well as record retention. Firms must keep records of all business-related communications regardless of the medium or device used in addition to monitoring them regularly, the regulator says.
No one-size-fits-all approach to cybersecurity
The regulator says it "recognizes there is no one-size-fits-all approach to cybersecurity." FINRA promises it will tailor its approach to assessing firms' cybersecurity programs based on several factors, including business model, risk profile and size.
Beware: The regulator notes some firms may fall under added scrutiny due to their vendor relationships and how they are managed.
Beware: The regulator notes some firms may fall under added scrutiny due to their vendor relationships and how they are managed.
Gaps in suspicious activity monitoring
FINRA says it has made note of several problem areas within firms' anti-money laundering programs. The regulator says it will pay special attention to "gaps in firms' automated trading and money movement surveillance systems caused by data integrity problems, poorly set parameters or surveillance patterns that do not capture problematic behavior such as suspicious microcap activity."
For example, in the past year FINRA has sanctioned several firms for deficiencies in anti-money laundering and other supervisory programs, includingRaymond James.
For example, in the past year FINRA has sanctioned several firms for deficiencies in anti-money laundering and other supervisory programs, including
