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FINRA 2019 Priorities Letter (Part Two) – Sales Practice Risks

January 23, 2019

by Howard Haykin


In its '2019 Priorities Letter', FINRA cites 3 areas of concern with regard to Sales Practice Risks:
  • Suitability
  • Senior Investors
  • Outside Business Activities and Private Securities Transactions



SUITABILITY.    A perennial FINRA priority, this year some of the specific areas on which FINRA may focus include, the following:


  • deficient quantitative suitability determinations or related supervisory controls;
  • overconcentration in illiquid securities -

►     e.g., variable annuities, non-traded alternative investments and securities sold through private placements; and,

  • recommendations to purchase share classes that are not in line with the customer’s investment time horizon or hold for a period that is inconsistent with the security’s performance characteristics -


►     e.g., including a recommendation to purchase and hold a security that is intended for short-term trading, or to engage in short-term trading in products designed primarily for long-term holding.


FINRA will also pay particular attention to such speculative or illiquid securities, such as … exchange-traded products or ETPs (e.g., leveraged and inverse ETFs), and securities products that package leveraged loans (e.g., collateralized loan obligations or CLOs).



SENIOR INVESTORS.    Another perennial priority, FINRA will continue to focus on how firms are protecting investors who are retired or approaching retirement from fraud, sales practice abuses and financial exploitation. FINRA will assess firms’ supervision of accounts where Registered Reps serve in a fiduciary capacity (e.g., where they hold POAs or act as trustee) and, where applicable, FINRA will assess supervisory systems for heightened scrutiny over such accounts.


FINRA is also interested in learning how firms are dealing with their obligations under amendments to FINRA Rule 4512 (Customer Account Information) and new FINRA Rule 2165 (Financial Exploitation of Specified Adults).



OUTSIDE BUSINESS ACTIVITIES (OBAS) AND PRIVATE SECURITIES TRANSACTIONS (PSTS).    FINRA will continue to assess firms’ controls related to associated persons’ OBAs and PSTs, including associated persons raising funds from their customers away from their firm and outside of their firm’s supervision. FINRA is 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.



NOTE:   The above comments are not intended to be a comprehensive analysis of the issues addressed by FINRA in its 2019 Priorities Report, which can only be obtained by accessing FINRA’s 2019 Priorities Report (click link below).