Finra warns brokers about moving clients from broker to advisory accounts

In 2018 exam priorities, regulator says not to sell clients high-fee products and then move them into advisory accounts

Jan 8, 2018 @ 2:24 pm

By Mark Schoeff Jr.

Finra warned brokers on Monday to be careful when moving clients between brokerage and advisory accounts.

The guidance was contained in the broker-dealer self-regulator's annual regulatory and examination priorities letter. As is the case in most years, the 2018 roster resembled the prior year's list.

A perennial Finra emphasis is on enforcing the suitability rule, which requires brokers to sell products that fit a customer's risk appetite, investment objectives and other characteristics.

In this year's priorities letter, however, Finra added a paragraph that it didn't have in the 2017 priorities that seems to target dually registered brokers who can act as both brokers and investment advisers.

"Finra will review situations in which registered representatives recommend a switch from a brokerage account where that switch clearly disadvantages the customer, such as where the registered representative recommended that the customer purchase a securities product subject to a front-end sales charge in a brokerage account and then shortly thereafter recommended that account be transferred to a fee-based account," the letter states.

A brokerage account must adhere to the suitability standard while a fee-based account is governed by fiduciary duty — the requirement investment advisers must meet to act in their clients' best interests.

"The message is that dually registered firms need to keep an eye on both their advisory and brokerage accounts," said Brian Rubin, a partner at the law firm Eversheds Sutherland. "Finra has jurisdiction to the extent that a dually registered firm is making recommendations that impact both the brokerage and advisory sides."

But in doing so, Finra also is stepping into an area — regulation of investment advisers — overseen by the Securities and Exchange Commission, said Todd Cipperman, principal at Cippperman Compliance Services.

"It's interesting that Finra, which has a suitability standard, is going there as well," Mr. Cipperman said. "I imagine that brokers will have questions about that."

New examination areas in the 2018 list include business continuity planning and initial coin offerings and cryptocurrencies.

The mania surrounding bitcoin has made it top of mind for all financial regulators.

"I don't think any self-respecting regulator wants to be caught behind in regulating coin offerings," Mr. Cipperman said.

As it did last year, Finra this year emphasized cybersecurity and high-risk firms and brokers.

The regulator said that it will focus on hiring and supervisory practices of brokerages that employ brokers with checkered disciplinary histories.

The emphasis is part of a "theme of supervision" in the letter, Mr. Cipperman said.

"They're trying to hold firms accountable for everything that goes on under their banner," he said. For large regional brokers, "it will put a lot of pressure on their compliance infrastructure."

The examination priorities list and the examinations findings report released last month are designed as a compliance guide for brokerages. Finra examines annually about half of its approximately 3,700 broker-dealer members. Finra also regulates about 634,000 registered representatives.

In a cover letter to the priorities list, Finra CEO Robert W. Cook promised that the organization would make some changes this year in the examination process.

"[W]e expect to add or strengthen measures to increase information sharing with firms during examinations, improve processes for making examination information requests and enhance training of examiners," Mr. Cook wrote.

The changes are a result of the Finra 360 self-evaluation that Mr. Cook launched last year.

"All of that sounds like they are reacting to comments and criticism they're receiving from the industry," said Mr. Rubin, a former deputy chief counsel at Finra's predecessor, the National Association of Securities Dealers. "They're trying to work better with [Finra] firms than they have in the past."


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