Finra’s sweep of broker-dealer cross-selling may head off problems

It shows Finra is carrying out its responsibility of regulating the industry and serving as the watchdog protecting the public.

The Financial Industry Regulatory Authority Inc.’s sweep of broker-dealer firms seeking data about cross-selling practices is a smart move, and could head off, or at least ameliorate, later problems.
The sweep was obviously prompted by the Wells Fargo cross-selling scandal that has cost the bank $185 million in fines and its CEO his job and bonus, and has further damaged the reputation of the banking industry.
The Wells Fargo scandal was prompted by poorly designed, performance-based compensation programs that incentivized employees to set up fake or unauthorized customer accounts. Shortly after the Wells scandal broke, Morgan Stanley was charged in Massachusetts with conducting an improper sales contest in which financial advisers were encouraged to get clients to take loans against their investment accounts.
It is certainly better for Finra to identify problem firms and practices, and pressure them to change, than for the Consumer Financial Protection Bureau, perhaps alerted by a whistleblower, to move in and take action against the firms.

DETAILED QUESTIONNAIRE

Finra has sent broker-dealers a request for information seeking responses to 15 detailed questions regarding cross-selling programs and incentives tied to those programs, along with documents supporting the responses.
Key among the questions are those dealing with the metrics used to track and evaluate employees’ performance related to cross-selling programs, and if employees have been terminated or disciplined for not meeting production goals or engaging in improper activities.
The information requested also included a list of complaints related to cross-selling that a firm may have received, and the status or disposition of the matters.
Finra is wise to explore the possibility of a significant cross-selling scandal lurking in the brokerage industry and get ahead of it if there is. It shows that it is carrying out its responsibility of regulating the industry and serving as the watchdog protecting the public.
Further, Finra’s request for information should prompt firms to examine their performance-based compensation programs to make sure they are not encouraging illegal or unethical behavior, and to modify them if they are, before a scandal erupts.