Earlier this month, FINRA released their “2019 Report on FINRA Examination Findings and Observations.”This annual report provides a summary of what the regulator believes to be somewhat significant findings gleaned from examinations of broker-dealers that it determines should be highlighted for the membership.The goal, I believe, is to draw attention of firms to these highlighted issues so that firms can identify any potential areas of weakness and then be able to implement any needed corrective action.In other words, firms can learn from the deficiencies found in examinations of other firms, and perhaps avoid having those same deficiencies cited in their own exam reports, as well as avoiding any enforcement actions from such problems.Obviously, this report does not spotlight each and every type of rule violation or regulatory concern found by the regulator over the past year, but it does show issues that FINRA must believe are important.And, if they think it is important, that means that they are examining for compliance with these issues.Forewarned is forearmed, as the saying goes.
The report is broken down into four categories: sales practice and supervision, firm operations, market integrity, and financial management.In the supervision section, FINRA notes that their exams found that firms had insufficient WSPs (written supervisory procedures) with respect to new or amended industry rules.For example, they cite to Rule 4512 as a new rule, amended FINRA Rule 3310 that incorporates now FinCen’s customer due diligence rule obligations, and the new fixed income mark-up disclosure requirements of FINRA Rule 2232.The point here for firms is to ensure that WSPs are updated when needed, due to the addition of new rules or amendments of others.
Another noteworthy supervision area was a finding that firms were not conducting periodic reviews of non-branch locations as required under the rules, and, in some cases, failed to document such reviews if they had been done.In addition, FINRA noted that in some cases firms were not following up on any corrective action that was determined as necessary from a branch inspection.In other words, once a red flag is spotted, proper attention should be given to ensure that the issue is fixed.
One of the more interesting findings in this supervision section related to falsification of documents.Here, FINR explained that “Some firms did not have reasonable processes to detect or prevent various forms of forgeries, including “accommodation forgery,” where registered representatives and associated persons asked customers to sign blank, partial or incomplete documents.”FINRA did not provide any guidance or best practices here, but they obviously are concerned about inadequate procedures to help prevent falsification of documents.
With respect to suitability, FINRA noted that some firms did not have a reasonably designed supervisory system that would assess the suitability of recommendations for product exchanges, such as mutual funds, variable annuities, or UITs.And in another finding, the regulatory found that some firms did not have a system in place to detect red flags of possibly unsuitable transactions.Here, as an example, FINRA noted that some firms did not “identify or question” patterns of similar recommendations by a representative or a branch office.Specifically, they noted the possibility where several clients of a particular advisor might be marked “unsolicited” and involve identical securities, which might raise the question as to whether those transactions all were actually unsolicited.
There are numerous other exam findings that FINRA has decided are noteworthy, including those relating to digital communications, AML, UGMA/custodial accounts, cybersecurity, and other operational, financial and market-related matters.Certainly not all of the findings, or spotlighted areas, will apply to every broker-dealer.Regardless, this report is something that I believe most firms should review and consider in assessing the strengths and weaknesses of their own WSPs and supervisory systems.
Related post: FINRA’s 2019 Exam Priorities