Finra released its regulatory and exam priorities for the new year Tuesday, saying most compliance problems can be alleviated if brokerage firms act in the best interests of their clients — an unusual move for an industry that must only ensure investments are suitable for clients.
“I've never seen them come out and say that before, and they're trying to make a point in doing so,” said Amy Lynch, president of FrontLine Compliance. “It's time for firms to change how they think about compliance.”
Before the Financial Industry Regulatory Authority Inc. delved into specific regulatory concerns, the 10th annual letter to members
outlined five general compliance themes that will help firms avoid regulatory trouble, starting with prioritizing their clients' interests over those of the firm.
“A central failing Finra has observed is firms not putting customers' interests first,” the letter states. “Irrespective of whether a firm must meet a suitability or fiduciary standard, Finra believes that firms best serve their customers — and reduce regulatory risk — by putting customers' interests first. This requires the firm to align its interests with those of the customer.”
The emphasis on fiduciary duty, which applies to investment advisers, caught some by surprise in a document by the industry-funded broker-dealer regulator because brokers must only adhere to a suitability standard. Under suitability, a broker can recommend high-priced investment products as long as they meet a client's investment goals and risk tolerance.
“They're trying to push the envelope with respect to their jurisdiction and how they think [registered] representatives should behave,” said Brian Rubin, a partner at Sutherland Asbill & Brennan.
In addition to prioritizing their clients' interests, firms should reduce conflicts of interest, establish a culture of compliance, implement strong supervision and risk controls, and tighten up their monitoring of complex products, the Finra letter states.
The 17-page letter outlines more than two dozen areas Finra will focus on in its 2015 examinations. Many of them are repeats from similar letters issued annually over the past decade. Always a concern are complex products, and this year's letter included interest-rate-sensitive fixed-income securities, variable annuities, alternative mutual funds and nontraded real estate investment trusts as top examination targets.
Finra also said it will monitor how brokers handle clients during times in their lives when they experience “wealth events,” such as acquiring a large amount of money through inheritance, sale of a business, life insurance payouts, divorce settlement or rolling over an individual retirement account.
“As in years past, it has everything but the kitchen sink,” Mr. Rubin said. “The large number of issues makes it hard for firms to focus on what their priorities should be.”
Last year's letter also touched on IRA rollovers. This year's version used rollovers to illustrate the emphasis that Finra is placing on broker behavior during key moments in a clients' lives.
“A broker's recommendations made in connection with a wealth event can have long-lasting consequences for the customer,” the Finra letter stated. “In 2015, examiners will focus on the controls firms have in place related to wealth events, with an emphasis on firms' compliance with their supervisory, suitability and disclosure obligations.”
The priorities letter also used current market conditions, such as the fall in oil prices and interest rate volatility, to highlight products that may harm investors.
“Some of these market changes are going to give them more [enforcement] ammunition,” Ms. Lynch said.
The Securities and Exchange Commission regulates investment advisers (as do state agencies for smaller firms). In 2012, Finra backed legislation that would have established a self-regulatory organization for investment advisers, offering itself as the best candidate for the role.
The bill died and Finra has said it is
no longer trying to expand its regulatory reach to advisers.
“To some degree, [the priority letter] is an end-run around that issue,” Mr. Rubin said.
