Finra focuses exam priorities on investor-protection threats

Online distribution of private placements pops up; exchange-traded products cause suitability worries

Jan 22, 2019 @ 2:07 pm

By Mark Schoeff Jr.

Emerging investor-protection threats like the online sale of unregistered securities, and other topics such as whether new exchange-traded products are suitable for customers, are highlights of this year's Finra examination priorities list.

In its 2019 Risk Monitoring and Examination Priorities Letter, the Financial Industry Regulatory Authority Inc. highlights internet sales of private placements, mark-up and mark-down disclosures for fixed-income products and regulatory technology as brand-new targets.

Within annual focus areas, Finra outlines new topics that will draw attention.

For instance, suitability is again on the exam list. This year, Finra is targeting overconcentration of illiquid securities, such as variable annuities, non-traded alternative investments and private placements, as well as recommendations of high-fee mutual fund share classes that don't align with a customer's investment objectives.

(More: SEC exams to focus on investor fees, adviser conflicts of interest in 2019)

Another repeat topic on the priority list is senior investor protection. This year, Finra is monitoring for compliance with new rules about obtaining trusted contacts for elderly investors and putting temporary holds on suspicious account distributions. The regulator is also zeroing in on situations where a broker has power of attorney or is a trustee for an older client.

The whittled-down approach seems to have emerged from the Finra 360 self-review.

"While we will continue to review and examine for longstanding priorities discussed in greater detail in past letters, we agree with the suggestion from many of our member firms that a sharper focus on emerging issues will help them better determine whether those issues are relevant to their businesses and how they should be addressed," Finra chief executive Robert Cook said in a statement.

The streamlined priority list, which totaled seven pages, was welcomed by compliance attorneys. Last year's list came in at 11 pages, while the 2017 roster was 14 pages.

"It's great they are no longer using an everything-but-the-kitchen-sink approach," said Brian Rubin, a partner at Eversheds Sutherland and a former Finra deputy chief counsel of enforcement. "Some of the prior letters contained far too many subjects for firms to focus on."

Emily Gordy, a partner at McGuireWoods, said the shortened priority list illustrates that Finra is in the process of taking a more holistic approach to risk monitoring and exams and creating a unified operation out of what used to be spread across many parts of the organization. This change of direction will help clarify for members what concerns Finra most.

"It tells firms where they need to look to assess their own regulatory procedures and controls," said Ms. Gordy, a former Finra deputy of enforcement.

(More: Mandatory arbitration isn't just for brokers — some investment advisers rely on it)

The short exam priority list shows that Finra is trying to keep pace with the industry, said Susan Grafton, a partner at Dechert.

"Finra has adapted its practices to reflect changes in the business, whether it's the increasing use of technology, development of novel products — including cryptocurrencies — or the aging population," she said.

The new emphasis on regulatory technology signals that Finra is taking a hard look at how firms utilize software to perform compliance functions. The regulator doesn't want them to cut corners.

"That reflects a long-standing view that you can't outsource compliance," Ms. Grafton said.

0
Comments

What do you think?

View comments

Recommended for you

Upcoming Event

Sep 10

Conference

Denver Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in six cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Featured video

Events

The power of commodities in 2019

Historically commodities have outperformed stocks at the end of expansions and in early recessions. So why haven't commodities rebounded? John Love of USCF explains.

Latest news & opinion

Look for more changes at Cetera Financial Group

CEO Robert Moore's resignation signals further adjustments at the IBD network.

10 top scams targeting seniors

Phone calls to a Senate committee hotline show trends in frauds perpetrated against seniors.

Robert Moore, Cetera CEO, stepping down for health reasons

Chairman Ben Brigeman will serve as interim chief executive while a search for a permanent CEO is conducted.

The AMT is no longer a problem for many clients

With income thresholds higher and a lower SALT deduction after tax reform, the AMT will realistically only apply to wealthy Americans with out-of-the-ordinary tax events.

Cetera, other broker-dealers refuse to sign Ohio National contracts

Advisers wonder what the lack of a formal brokerage agreement means from a regulatory standpoint.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print