In a departure from its approach in the past, FINRA’s annual Regulatory and Examination Priorities Letter for 2015, issued Jan. 6, said that brokers can avoid compliance problems by acting in the best interests of their clients — a standard of fiduciary duty beyond the suitability standard.
“A central failing Finra has observed is firms not putting customers' interests first,” according to the letter. “Irrespective of whether a firm must meet a suitability or fiduciary standard, Finra believes that firms best serve their customers — and reduce regulatory risk — by putting customers' interests first. This requires the firm to align its interests with those of the customer.”
In an overview accompanying the priorities list, Richard G. Ketchum, FINRA’s Chairman and CEO, noted “shortcomings in five key areas that compromise firms' and registered representatives' ability to protect investors and the integrity of the market”:
- alignment of firm and customer interests;
- standards of ethical behavior;
- development of strong supervisory and risk management systems;
- development, marketing and sale of novel products and services; and
- management of conflicts of interest.
IRA rollovers, variable annuities and conflicts of interest were among the nearly 30 exam priorities listed in the letter.
IRA Rollovers
In 2015, FINRA examiners will focus on the controls firms have in place related to wealth events, with an emphasis on firms’ compliance with their supervisory, suitability and disclosure obligations. “Firms’ systems should be reasonably designed to help ensure that financial incentives to the associated person or the firm do not compromise the objectivity of suitability reviews,” the letter states.
Variable Annuities
“FINRA’s focus on sales practice issues with variable annuities 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,” according to the letter. FINRA examiners will also focus on the design and implementation of procedures and training by compliance and supervisory personnel to test the level of brokers’ and supervisors’ product knowledge.
Conflicts of Interest
Noting recent FINRA enforcement actions involving firms’ failure to adequately address conflicts of interest by offering favorable research in connection with potential investment banking business, the letter notes that, “We are also reviewing situations where market access customers self-monitor and self-report suspicious trading despite this inherent conflict of interest. And, we continue to focus on fee and compensation structures that lie at the heart of many conflicts and which can at times compromise the objectivity registered representatives provide to customers."
Among the other items on the priorities list for 2015:
- order routing practices
- cross-market and cross-product manipulation
- timely reporting of disclosable information
- outsourcing and compliance
- cybersecurity
- sales charge discounts
- excessive trading
Better Response to Information Requests
The letter also warns brokers about responding to exam-related requests for information from FINRA on a timely basis. “FINRA has experienced an increasing number of situations where some firms have repeatedly failed to provide timely responses to its information requests made in connection with examinations and investigations … These situations are not acceptable, as timely productions of information (as well as oral information through interviews and on-the-record testimony) are critical to FINRA achieving its investor protection and market integrity mission by identifying and shutting down bad practices and bad actors at the earliest possible time. FINRA reiterates firms’ obligation to respond to FINRA inquiries in a full and timely fashion, and cautions firms that production failures expose firms to disciplinary action.”
