A letter from the U.S. self-regulatory organization highlights areas of concern
By James Langton |
The Washington, D.C.-based Financial Industry Regulatory Authority (FINRA) on Tuesday released its 2016 Regulatory and Examination Priorities letter highlighting three broad issues: supervision; risk management and controls; and liquidity.
The letter also emphasizes firm culture, conflicts of interest and ethics, and the significant role each of these plays in the way a firm conducts its business.
Within these broad areas, FINRA is already carrying out a targeted examination of retail brokers’ incentive structures and conflicts of interest, the letter from the self-regulatory organization (SRO) says.
That review, which was launched in late 2015, is looking at firms’ processes for mitigating conflicts created by advisors’ compensation plans, including conflicts that arise from the sale of proprietary products; and, conflicts created by firms’ recruitment practices.
Sales practices and suitability remain a priority for FINRA, and the SRO acknowledges that meeting these obligations is made tougher when more complex, or speculative products are involved. “While many firms have established robust systems to support such recommendations, others have not — and FINRA has observed firms failing to tailor their systems to the specifics of their product offerings,” the FINRA letter says.
The SRO has also observed shortcomings in some firms’ new product review committees and training programs, the letter notes, adding that FINRA will focus on firms’ policies and processes that govern monitoring for excessive concentrations.
Seniors and other vulnerable investors also remain a priority for FINRA. The SRO has “observed repeated situations where seniors have been victims of fraud and abuse”, the letter says, including reps that have borrowed large sums of money from elderly clients, reps that taken control of clients’ assets through powers of attorney and other mechanisms, and reps recommending products that are not suitable for an elderly investor but provide high commissions and payouts to the rep. FINRA’s examinations in this area will include suitability and concentration concerns, along with recommendations involving higher-cost products that may lead to unsuitable recommendations, the letter adds.
Other top priorities for the SRO include supervision, risk management and firms’ controls. FINRA examinations will emphasize anti-money laundering compliance, cybersecurity, technology management, outsourcing and data quality, the letter notes. The SRO will also review the adequacy of firms’ contingency funding plans, both in light of their business model, and amid possible market stress. It will also evaluate high-frequency-trading firms’ liquidity planning and controls, the letter notes.
“Nearly a decade after the financial crisis, some firms continue to experience systemic breakdowns manifested through significant violations due to poor cultures of compliance,” says Richard Ketchum, FINRA’s chairman and CEO, in a statement.
To address these concerns, FINRA will formalize its assessment of firm culture to better understand how it impacts compliance and risk management, the letter notes.
“In 2016, FINRA will be looking for firms to focus on their culture and whether it is putting customers first and promoting risk management adaptable to a changing business environment. Our goal is not to dictate a specific culture, but rather to understand how each firm’s culture affects compliance and risk management practices,” Ketchum says.
“Firms with a strong ethical culture and senior leaders who set the right tone, lead by example, and impose consequences on anyone who violates the firm’s cultural norms are essential to restoring investor confidence and trust in the securities industry.”
Best Due Diligence meeting in the industry. No sales pitches, senior level decision makers, meaningful discussions and the Broker Dealer networking sessions were especially useful. Thanks to Blue Vault for raising the bar!