Each year, FINRA issues a letter outlining several examination priorities, providing the industry with insight into what issues are on the regulator’s mind, and what areas the industry can expect to be a focus of regulatory examinations throughout the year. Now, this does not mean that the regulator will not look at other areas or turn a blind eye to violations that are not in the exam priorities letter, but it does mean that additional scrutiny will be placed on the areas identified as potentially problematic in the annual letter.
Because we represent so many individual financial advisors in various regulatory and compliance matters, we’ve focused our review of the 2019 letter on items likely to directly effect an individual advisor. As an old litigator used to tell me often, forewarned is forearmed, and it makes sense to know what the other side thinks is important. So, with that in mind, here are the issues from the 2019 priorities letter on which we believe individual financial advisors should direct particular attention.
1.Suitability remains a mainstay of FINRA’s review. Here, making sure that the advisors make appropriate suitability determinations for complex products, mutual fund and variable annuity share classes, as well as the use of margin, will get some scrutiny. Further, FINRA will review for overconcentration in illiquid products such as variable annuities, non-traded products and private placements. The regulator specifically highlights that they are concerned about share class recommendations in light of both the client’s time horizon and the characteristics of the security (here, they use as an example a recommendation to buy and hold a product intended for short-term trading, or engaging in short-term trading of products designed for longer-term holding).
2.Senior investors again make the priority list, as they have for a number of years. Importantly, FINRA advises that they will assess a firm’s supervision of accounts of senior investors where the advisor serves as some type of fiduciary or beneficiary (think here of a situation where the client is not a close family member and the advisor holds a POA for the client, acts as a trustee or co-trustee, or has some type of beneficiary relationship)(of course, many firms prohibit this type of activity, but perhaps not all do). FINRA will also review how firms are protecting their senior clients from fraud and exploitation. With respect to an individual FA, this means that he or she should be particularly attentive to a firm’s supervisory procedures and compliance requirements regarding serving as a fiduciary for a client, as well as to following, and documenting compliance with, firm policies concerning that, along with those relating to third-party trading authorization for a client. FAs should also be alert for possible fraudulent disbursements or exploitation by another, and reporting red flags, among other things, and make sure that they are following their firm’s policies regarding reporting suspicious behavior.
3.Outside Activities and Selling Away. Each month we typically see reported enforcement actions where FINRA sanctions an advisor for participating in unapproved outside business activities or engaging in private securities transactions.I don’t expect that to change, and we know FINRA will always investigate, and often take action on, allegations of OBA and selling away violations.In this year’s priorities letter, FINRA writes that they are “particularly concerned about fundraising activities for entities that the associated persons control or in which they have an interest, specifically entities with potentially misleading names that are similar to established issuers.”
Broker-dealer firms have more issues to consider than these, as supervision and use of distribution platforms and technology are on the list, along with mark-ups on fixed income products, best execution, along with several market and operational risk-related issues. You can read the full letter here.