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- Sarah ten Siethoff is New Associate Director of SEC Investment Management Rulemaking Office
- Catherine Keating Appointed CEO of BNY Mellon Wealth Management
- Credit Suisse to Pay $47Mn to Resolve DOJ Asia Probe
- SEC Chair Clayton Goes 'Hat in Hand' Before Congress on 2019 Budget Request
- SEC's Opening Remarks to the Elder Justice Coordinating Council
- Massachusetts Jury Convicts CA Attorney of Securities Fraud
- Deutsche Bank Says 3 Senior Investment Bankers to Leave Firm
- World’s Biggest Hedge Fund Reportedly ‘Bearish On Financial Assets’
- SEC Fines Constant Contact, Popular Email Marketer, for Overstating Subscriber Numbers
- SocGen Agrees to Pay $1.3 Billion to End Libya, Libor Probes
- Cryptocurrency Exchange Bitfinex Briefly Halts Trading After Cyber Attack
- SEC Names Valerie Szczepanik Senior Advisor for Digital Assets and Innovation
- SEC Modernizes Delivery of Fund Reports, Seeks Public Feedback on Improving Fund Disclosure
- NYSE Says SEC Plan to Limit Exchange Rebates Would Hurt Investors
- Deutsche Bank faces another challenge with Fed stress test
- Former JPMorgan Broker Files racial discrimination suit against company
- $3.3Mn Winning Bid for Lunch with Warren Buffett
- Julie Erhardt is SEC's New Acting Chief Risk Officer
- Chyhe Becker is SEC's New Acting Chief Economist, Acting Director of Economic and Risk Analysis Division
- Getting a Handle on Virtual Currencies - FINRA
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NEWSLETTERS & ALERTS
Suitability for Retail Customers (FINRA Exam Findings - Part 2)
by Howard Haykin
FINRA’s Annual Report on Examination Findings, released Friday, December 7th, was fairly predictable in reporting that “Suitability for Retail Customers” is the regulator’s Number One Highlighted Observation.
Time and again, FINRA observed firms and their associated persons operating in violation of FINRA Rule 2111, Suitability. And in those instances where registered reps repeatedly engaged in unsuitable recommendations, FINRA goes so far as to suggest that firms consider subjecting such reps to special supervisory procedures – i.e., heightened supervision plans – as detailed in FINRA Regulatory Notice 18-15.
SELECTED EXAMINATION FINDINGS. FINRA addressed product suitability in its 2017 Report on Examination Findings,
and it supplements those observations with the following insights from recent FINRA examinations, as well as from its 2018 targeted examination (sweep) of volatility-linked products.
- Overconcentration. Once again, some customer accounts were concentrated in complex structured notes or sector-specific investments, as well as illiquid securities, such as non-traded real estate investment trusts (REITs). These positions are not only unsuitable for unsophisticated customers, but they result in significant customer losses. In some instances, firms lacked procedures or systems reasonably designed to identify and supervise the concentration of such products in customers’ accounts.
- Excessive Trading. Some firms failed to establish and enforce an adequate supervisory system reasonably designed to identify and prevent potentially excessive trading in customer accounts. And even where firms employ an “active account” letter (or “activity letter”) process, such efforts were doomed by inadequate supervision or overly general and ineffectual letters.
- Unsuitable Variable Annuity Recommendations – Some firms failed to establish, maintain and enforce supervisory systems and WSPs reasonably designed to ensure that reps’ recommendations of variable annuities complied with suitability obligations. Rep-driven recommendations to retail customers to exchange one annuity product for another are often costly, unsuitable and largely unsupervised. In some cases, registered reps and their supervisors lacked adequate training in these products.
TAKING A CUE FROM SOUND SUPERVISORY PRACTICES. Firms with sound supervisory practices for suitability generally identified risks, developed policies, and implemented controls tailored to the specific features of the products they offered and their customer base. These controls included:
- restricting or prohibiting recommendations of products for certain investors, as well as establishing systems-based controls (or “hard blocks”) for recommendations of certain products to retail investors to ensure that registered reps adhered to those restrictions or prohibitions.
- verifying the source of funds for variable annuity transactions.
- requiring training on specific complex or high-risk products before reps may recommend them and before principals may supervise such sales by reps.
- Recognizing instances where a firm or its associated persons has “actual or de facto control” over a customer’s account.