Finra notes compliance pitfalls in first-time release of exam findings

Broker-dealer self-regulator summarizes deficiencies on areas including product suitability, cybersecurity

Dec 6, 2017 @ 5:24 pm

By Mark Schoeff Jr.

Finra released for the first time on Wednesday a summary of findings from recent examinations, highlighting areas where the broker self-regulator's member firms are experiencing compliance shortfalls.

The 14-page report is one of the first major results of a self-examination of the Financial Industry Regulatory Authority Inc., called Finra 360, that President and Chief Executive Robert Cook launched earlier this year.

The report provides observations in 11 exam areas, including product suitability, outside business activities, best execution, alternative investments held in individual retirement accounts and cybersecurity.

"Finra is issuing this report as another resource that firms can use to strengthen their compliance with securities rules and regulations," the report states. "Some firms have requested that Finra make generally available a summary of observations from the cycle examination program, so that they can further improve their compliance functions based on the experiences of other firms and better anticipate and address potential areas of concern well before their own cycle examinations."

Finra identified unit investment trusts and certain multi-share class and complex products, such as leveraged and inverse exchange-traded funds, as products that are causing particular worries. For instance, Finra found that some firms recommended higher-fee share classes and complex products without determining whether they fit a customer's objectives and risk tolerance.

Finra also said that it observed inadequate policies, procedures and training of registered representatives related to suitability determinations.

"At one firm, for example, Finra observed that in a sample of short-term surrender variable annuity transactions, over 50% of customers had a long-term investment time horizon," the report states.

The report highlights what Finra believes is effective compliance.

"There should be no inference, however, that Finra requires firms to implement any specific practices described in this report that extend beyond the requirements of existing securities rules and regulations," the report states.


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