FINRA Resolutions: Additional Sales Practices

By Patricia Uceda, Spring 2015 Graduate Research Assistant.

In 2015 FINRA has resolved to focus on several areas in order to better serve public investors, including key sales practices. In addition to the specific product-related issues we discussed earlier, FINRA also plans to focus in on other areas of sales practice including supervision rules, wealth events, excessive trading controls, private placements, high-risk brokers, sales charge discounts and waivers, senior investors, anti-money laundering, and municipal advisors and securities. Here is a brief summary of each of these areas of focus.

  • Supervision Rules: FINRA has new supervision rules which became effective on December 1, 2014. These include FINRA Rules 3110, 3120, 3150, and 3170. These rule changes modify requirements relating to managing conflicts of interest, performing risk-based review of correspondence and internal communications, monitoring for insider trading, conducting internal investigations, and testing and verifying supervisory control procedures, among other things. FINRA has assigned regulatory coordinators to contact and inspect assigned firms in order to address any questions and ensure that firms are implementing the new requirements.
  • Wealth Events: FINRA plans on focusing on firms’ controls around the handling of certain wealth events such as IRA rollovers. A wealth event is a situation in which an investor must make a decision regarding what to do with a large amount of money arising from an inheritance, life insurance payment, sale of a major asset, divorce settlement, or IRA rollover. These are huge decisions, and a broker’s recommendation can have lasting consequences. Firms’ supervisory systems should be designed to ensure that representatives are giving wholly objective recommendations that are fair and balanced and are unaffected by any financial incentives.
  • Excessive Trading Controls: In 2015 FINRA will focus on firms’ supervisory systems and the controls they have in place for monitoring excessive trading and product concentration. This has been an area where FINRA has observed shortcomings in prior years, and they have provided firms with practices that should help bolster their supervision. FINRA will also review customer communications and account activity to determine whether aggressive trading strategies were recommended which resulted in excessive trading or in a customer’s portfolio becoming over-concentrated.
  • Private Placements: Private placements are a continuing area of concern for FINRA because of the high risk for broker-dealers participating in these private offerings to conduct an inadequate due diligence and suitability analysis. Firms must file private placement materials with FINRA pursuant to Rules 5122 or 5123, however, FINRA staff have identified numerous offering documents containing misrepresentations and omissions of material information. FINRA will continue to monitor this area to ensure that private placements comply with procedures and are adequate enough to support a suitability determination.
  • High-Risk Brokers: FINRA has concerns over high-risk brokers because these generally tend to pose the most risk to investors and give them a heightened potential to become a fraud victim. In order to better target these high-risk brokers, FINRA is expanding its use of data mining, analytics, and expedited investigations and enforcement actions. In addition, FINRA will focus rigorous regulatory attention on firms that hire or seek to hire these high-risk brokers.
  • Sales Charge Discounts and Waivers: In some cases customers do not receive volume discounts (breakpoints) or sales charges waivers that they are entitled to when they purchase products such as non-traded REITs, Unit Investment Trusts, Business Development Corporations and mutual funds. FINRA plans on making this issue a priority in 2015 through rigorous examinations and enforcement actions. Firms should have adequate systems in place to ensure that these breakpoints and sale charge waivers are provided to customers.
  • Senior Investors: As we’ve discussed previously, senior investors are particularly at risk for investment fraud. Additionally, consequences of unsuitable investment advice can be particularly severe for this investment group because they lack the funds and time to make up any losses. FINRA examiners will continue to ensure that firms have specific internal guidelines in place to protect senior investors.