FINRA released the second podcast in a five-part series providing an overview of FINRA’s 2014 examination priorities. This podcast focuses on recidivist brokers, conflicts of interest, cybersecurity, qualified plan rollovers, suitability and due diligence of private placements.
- Recidivist brokers: A small number of brokers have demonstrated a pattern of complaints or disclosures for sales practice abuses that could harm investors as well as the reputations of the securities industry and financial markets. In 2014, FINRA will expand the high-risk broker program and create a dedicated enforcement team to prosecute cases. When FINRA examines a firm that hires these high-risk brokers, examiners will review the firm’s due diligence conducted in the hiring process, review for the adequacy of supervision of higher risk brokers – including whether the brokers have been placed under heightened supervision – based on the patterns of past conduct, and will place particular focus on these brokers’ clients’ accounts in conducting reviews of sales practices. Using sophisticated analytics known as the Broker Migration Model, FINRA identifies and monitors both brokers who move from a firm that has been expelled or otherwise has a serious disciplinary history to another FINRA-regulated firm, and the firms that hire such brokers. FINRA uses the model’s risk scoring, among other means, to prioritize surveillance and to conduct focused or accelerated examinations and enforcement efforts.
- Conflicts of interest: Examiners will explore topics addressed in the report, including firms’ approaches to identifying and managing conflicts, as well as the participation of senior management in this process. Reviews will include firms’ approaches to conducting new product reviews to identify and mitigate potential conflicts raised by those products. FINRA will also assess whether wealth management businesses make independent decisions about the products they offer without pressure to favor proprietary products or products for which the firm has revenue-sharing agreements.
- Cybersecurity: Cybersecurity remains a priority for FINRA in 2014, given the ongoing cybersecurity issues reported across the financial services industry. In recent years, many of the nation’s largest financial institutions were targeted for disruptions through a range of different types of attacks. The frequency and sophistication of these attacks appears to be increasing. In light of this ongoing threat, FINRA continues to be concerned about the integrity of firms’ infrastructure and the safety and security of sensitive customer data. FINRA’s evaluation of such controls may take the form of examinations and targeted investigations.
- Qualified plan rollovers: FINRA is concerned that investors might be misled about the benefits of rolling over assets from a 401(k) plan to an IRA. In Regulatory Notice 13-23, FINRA warned firms and associated persons not to make claims of “free IRAs” or “no-fee IRAs” where investors do pay costs associated with these accounts. In 2014, reviewing firm rollover practices will be an examination priority, and staff will examine firms’ marketing materials and supervision in this area. FINRA will also evaluate securities recommendations made in rollover scenarios to determine whether they comply with suitability standards in FINRA Rule 2111.
- Suitability and due diligence of private placements: FINRA stated that it will examine firms’ private placement activity to ascertain whether firms are taking reasonable steps to validate that investors meet accredited investor standards. Also, the recent Regulation D amendments do not diminish a firm’s responsibility to conduct adequate due diligence on its offerings to ensure that any recommendations to purchase securities in a private placement are suitable.
See: FINRA Podcast.
Related news: FINRA Podcast: 2014 Regulatory and Examination Priorities – Part 1, Suitability (March 14, 2014).