In its recently-released, second-annual Report on FINRA Examination Findings, the Financial Industry Regulatory Authority (FINRA) highlighted observations gleaned from its firm examination program. The intent of the report is to promote transparency into the regulator’s activities, giving firms insight into some of the common issues other regulated firms face. Financial services organizations that want to take a more proactive approach to their compliance programs can leverage the report’s findings to enhance their written supervisory procedures and controls.
The subject areas selected for the report do not represent a comprehensive list of problem areas for examined firms. However, the findings can still serve to help other firms evaluate their readiness for a FINRA exam. In addition to identifying areas of concern, the report also includes observations about best practices firms may want to consider implementing to strengthen their own compliance programs.
A Focus on Suitability for Retail Customers
The new report reminds firms of their obligations under the “Suitability Rule” (FINRA Rule 2111.) That rule imposes three requirements on FINRA members, including:
- Reasonable-basis suitability;
- Customer-specific suitability; and
- Quantitative suitability.
FINRA noted that in its examinations, firms with sound supervisory practices generally had controls that were tailored to ensure product recommendations and offerings were suitable for retail customers. In contrast, in firms without adequate supervisory processes in place, suitability was more likely to be a challenge. Some of the specific exam findings related to suitability included problems with:
- Overconcentration. Some firms lacked systems and procedures designed to identify concentrations in client accounts of complex, illiquid, or sector-specific investments.
- Excessive trading. Firms cited for excessive trading violations often weren’t using “available compliance tools designed to detect excessive trading, commissions, or trading losses in customer accounts.”
- Unsuitable recommendations. Unsuitable recommendations related to variable products continues to be problematic among some FINRA member firms.
Best Practices Center on Firms’ Compliance Controls
General suitability was just one area covered under the annual report. Other findings include concerns related to fixed income mark-up disclosure, private placement due diligence, abuse of discretionary authority, AML, net capital inaccuracies, liquidity, segregation of client assets, customer confirmation deficiencies, operations professional registration violations, DBAs and communications with the public, best execution, TRACE reporting, and market access controls.
Regardless of the specific infraction, two common threads throughout the report are inadequate compliance controls and training, for both rank-and-file employees and supervisors. When firms did have specific training programs, policies, or compliance systems in place, a failure to follow or utilize those tools led to violations that could potentially have been avoided.
Firms should evaluate their own compliance policies, procedures, and controls against the findings in the new report. If regulatory technology is not being leveraged to its full capabilities today, consider the benefits of doing so, not the least of which could be avoiding unnecessary regulatory scrutiny.