Header graphic for print
The BD/IA Regulator Providing securities regulatory, enforcement and litigation trends for broker-dealers, investment advisers and investment funds

FINRA Issues Report on Its Examination Findings

Posted in Anti-Money Laundering, Broker-Dealer Regulation, FINRA Enforcement

In December 2017, FINRA issued a report highlighting several key findings from its recent examinations of broker-dealer members.  The report is available here.

The report focuses on several observations from recent examinations that FINRA believed would be worth highlighting to members.  Of course, the report cannot list all of FINRA’s concerns; however, FINRA selected these issues based on their “potential impact on investors and markets or the frequency with which they occur.”  The report also describes a number of practices that FINRA has observed to be helpful for some members in carrying out their duties.

The report covers a fairly wide variety of regulatory and compliance areas, which are summarized below.

  • Cybersecurity: While broker-dealers have substantially enhanced their attention to these issues, FINRA lists a variety of areas where it believed broker-dealers of various sizes could improve their cybersecurity programs.
  • Outside Business Activities: FINRA noted a variety of ways in which some firms did not fully comply with their obligations under Rules 3270 and 3280 as to associated persons’ outside business activities and securities transactions.
  • Anti-Money Laundering: FINRA determined that some firms did not establish and implement an AML program reasonably designed to detect and cause the reporting of suspicious activities.
  • Product Suitability: FINRA identified a number of issues that were not necessarily linked to the size of the broker-dealers, including:
    • Customers were advised to roll UIT investments early, generating additional fees, but these broker-dealers did not have appropriate mechanisms to identify and review these recommendations.
    • Brokers recommended higher-fee share classes of mutual funds and complex products without making an appropriate suitability determination and, in some cases, did not attempt to obtain key pieces of investor profile information.
    • Some firms did not establish adequate supervisory systems and written supervisory procedures as to funds with multiple share classes and complex products.
    • Some firms did not adequately train their representatives as to suitability issues.
  • Best Execution: FINRA determined that some firms did not conduct an adequate regular review of the quality of the executions of customer orders.
  • Market Access Controls (SEC Rule 15c3-5): FINRA determined that some firms did not satisfy their obligations under the rule, particularly as to the establishment of pre-traded financial thresholds, implementing and monitoring aggregate capital or credit exposures, and tailoring erroneous trade controls.
  • Order Capacity: Some broker-dealers sometimes failed to comply with the requirement to enter the correct capacity code, such as agency, principal and risk-less principal) when reporting off-exchange trades. (As we have previously indicated, a number of firms have changed their trading practices in light of, for example, the DOL’s fiduciary rules.)
  • TRACE Reporting: FINRA identified a variety of issues in the TRACE reporting of debt securities, including late reporting of transactions.

The report also identified a number of deficiencies in broker-dealers’ maintenance of alternative investments in IRAs, net capital and credit risk assessment requirements, and Regulation SHO compliance.

FINRA indicated that it expects to update the report over time, with a view to assisting broker-dealers with their various compliance obligations.  However, even for now, the report is a useful read for broker-dealer compliance departments, providing a useful guide to some of FINRA’s current key concerns, and a variety of observations of useful practices to follow.