Be Prepared! FINRA Enforcement Priorities

Each year FINRA releases a letter that details the list of enforcement priorities they intend to focus on in their examinations.  Below is a list of the highlights from the 2017 letter.  I have tried to single out the items from the letter that are most relevant to the average rep-advisor.  Rep-advisors should be mindful of the added importance FINRA is placing on these specific items.   If there are items on the list that require further explanation or attention, rep-advisors should contact their compliance team for assistance.

High Risk and Recidivist Brokers

FINRA has created a dedicated exam unit specifically to review brokers with CRD issues.  FINRA wants to ensure that firms are properly supervising the activities of these brokers in a more heightened manner.  High Risk and recidivist brokers require special heightened supervision plans.  FINRA will be giving particular attention to these plans – making sure they are in place and being properly followed.

FINRA also wants to be sure that firms are performing proper reviews of reps they are hiring.  The due diligence and vetting of reps with CRD issues should be more rigorous and meticulous in nature.

Senior Investors

Protecting senior investors from fraud, abuse and improper advice continues to be a 2017 top priority.  Firms should be properly evaluating the sales to seniors of any product, but special attention should be given to speculative and complex products.  This year there is also a particular emphasis on penny stock sales to seniors.

The supervision on senior sales must be comprehensive and, if warranted, should include phone calls to the senior client to ascertain their knowledge and understanding of the transaction.

Product Suitability and Concentration

Firms need to constantly evaluate their rep’s understanding of the products and product features their rep’s sell.  Inquiries as to the rep’s product knowledge should accompany suitability reviews.

Firms should pay careful attention to avoid the excess concentration of a client’s assets in a particular product or industry sector.  Established guidelines should be followed.

In 2017 there will be particular emphasis on complex products such as ETPs (exchange traded products), REITs and BDCs.  Expect heightened vetting of these product sales.

Excessive Short Term Trading of Long Term Products

Mutual Funds, Variable Annuities and UITs (unit investment trusts) being sold and re-sold multiple times in short time periods is not permitted.  Enhancing the vetting to look for these activities will be stressed.

Switch Letters are required whenever the sale or redemption of any investment product with a sales charge is made to purchase another investment product with a sales charge.  FINRA will be making sure firms are requiring switch letters consistently and as required.

OBAs and Private Securities Transactions

FINRA will continue to look for instances where reps are not properly reporting OBAs and Private Securities transactions as required.  All OBAs and Private Securities Transactions should be reported and approved by the firm PRIOR to the commencement of the activity.  FINRA is carefully scrutinizing these activities to be sure there are not conflicts of interest between these activities and the rep-advisor’s securities business.

Social Media and Electronic Communication

FINRA requires the retention and supervision of all electronic communication.  In order to insure this requirement, rep-advisors must be following the firm’s e-mail directives including both the sending of email and the storage requirements.

Social Media (Linked In, Twitter, Facebook) must be properly reviewed and approved prior to use and also must be set up for monitoring in order to meet the firm’s compliance requirements.  FINRA will be checking these online programs to be sure rep-advisors are complying with firm requirements.  Rep-advisors should be sure they understand the requirements surrounding these online social media services.

Cyber Security

The strong and consistent use of passwords and encryption on all electronic devices is required.  FINRA will be looking to make sure these requirements are being met.  Also, virus and firewall protection patches and updates should be performed timely and consistently.  The physical security of portable storage devices and client data is required.  FINRA is scrutinizing the firm’s, and individual rep-advisor’s, electronic device procedures to be sure the safety of client data is being diligently safeguarded.

The above list is a summary sample of the items listed in the 2017 FINRA Enforcement Priorities.  The letter itemizing the entire list of heightened enforcement priorities, including more detail, can be found on FINRA’s website.

Please keep in mind that FINRA is now not only conducting on site reviews at the firm (B/D) level.  They also are visiting branch offices and the offices of individual rep-advisor’s of the firm’s they are auditing.

Take some time now to review your procedures to make sure you are meeting your obligations and requirements as a rep-advisor.  Be proactive and be prepared!



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