Wednesday, January 7, 2015

FINRA Releases 2015 Regulatory and Exam Priorities Letter

The Financial Industry Regulatory Authority (FINRA) today released its 2015 Regulatory and Examination Priorities letter highlighting significant risks and issues that, if not properly addressed, could adversely affect investors and market integrity.

This year's letter, focuses on key sales practice, financial and operational, and market integrity matters, and identifies challenges in five key areas that should be addressed to get ahead of the concerns raised in the letter.

Briefly stated, some of the more important areas are:

  • Products, including Interest Rate Sensitive Securities, Variable Annuities, Alternative Mutual Funds, Non-Traded Real Estate Investment Trusts (REITs), Exchange-Traded Products (ETPs) Tracking Alternatively Weighted Indices, Structured Retail Products (SRPs), and Securities-Backed Lines of Credit (SBLOCs)
  • Supervision Rules - FINRA’s new supervision rules (FINRA Rules 3110, 3120, 3150 and 3170) became effective on December 1, 2014. These new rules modify requirements relating to, among other things: (1) supervising offices of supervisory jurisdiction and inspecting non-branch offices; (2) managing conflicts of interest in a firm’s supervisory system; (3) performing risk-based review of correspondence and internal communications; (4) carrying out risk-based review of investment banking and securities transactions; (5) monitoring for insider trading, conducting internal investigations and reporting related information to FINRA; and (6) testing and verifying supervisory control procedures. 
  • Individual Retirement Account (IRA) Rollovers (and Other “Wealth Events”) - FINRA is focused on firms’ controls around the handling of wealth events in investors’ lives. Wealth events refer to those situations where an investor faces the decision about what to do with a large amount of money arising from an inheritance, life insurance payout, sale of a business or other major asset, divorce settlement or an IRA rollover, among other events.
  • Excessive Trading and Concentration Controls - FINRA has observed shortcomings in firms’ supervision of quantitative suitability and concentration, for example, through the failure to supervise for compliance with issuer concentration guidelines.
  • Private Placements - Private placements continue to raise concerns and will be an area of focus in 2015. Broker dealers participate in private offerings in a number of capacities, and common concerns across these capacities include inadequate due diligence and suitability analysis. 
  • High-Risk and Recidivist Brokers - FINRA continues to claim that certain "high risk brokers cause  risk to investors.  FINRA devotes substantial attention to brokers that it's staff members believe pose greater risk to the investing public. Whether this is a correct assumption or not, FINRA is expanding its use of data mining, analytics, specially targeted examinations, and expedited investigations and enforcement actions.
  •  Sales Charge Discounts and Waivers - FINRA claims that in some instances customers do not receive the volume discounts (breakpoints) or sales charge waivers to which they are entitled when purchasing products like non-traded REITs, Unit Investment Trusts, Business Development Corporations and mutual funds. (Not mentioned is the situation where a customer receives a waiver that FINRA believes he was not entitled to receive, and brings a proceeding against the broker. FINRA brought such a case against one of my clients, and lost after a hearing. Maybe that is why they are not mentioning it?)
  • Senior Investors - FINRA examiners will continue to review communications with seniors; the suitability of investment recommendations made to seniors, including with respect to the products discussed above; the training of registered representatives to handle senior-specific issues; and the supervision firms have in place to protect seniors. 

There are additional areas that will be targeted and I urge you to review the entire letter carefully. If you need assistance in reviewing your policies and procedures, before FINRA comes knocking, give me a call - 212-509-6544

FINRA Releases 2015 Regulatory and Exam Priorities Letter


The attorneys at Sallah Astarita & Cox include veteran securities litigators and former SEC Enforcement Attorneys. We have decades of experience in securities litigation matters, including the defense of enforcement actions and representation of investors, financial professionals and investment firms, nationwide. For more information call 212-509-6544 or send an email.