The Financial Industry Regulatory Authority (FINRA) has published the results of its 2017 examinations of broker-dealers. The report highlights selected and collected observations gleaned from recent examinations. The Authority’s goal is to help firms fast-track identification and remediation of issues by firms before exposures, errors, or omissions are identified by the regulators before fines and/or other actions are issued by the regulators.
Outside Business Activities in the crosshairs
In its 2017 report, FINRA noted that “all sizes of retail brokerage firms in which registered persons, other associated persons or firms failed to meet one or more of their obligation under Rules 3270 and 3280 which require representatives to notify their firms of proposed outside business activities (OBAs).” This precluded the firms from being able to determine whether to limit or permit those activities to go forward. The Authority, which included private securities transactions (PST) in its report on OBAs, identified three particular failures, which included problems related to:
- Notice – Some individuals failed to notify their firms of proposed OBAs or PSTs, or a new hire or current registered or associated person failed to notify their prospective or current firm in writing of an existing OBA or PST. In some cases, the oversight was due to lack of knowledge (what is an OBA or PST) or verbal was given rather than the required written notice. In other cases, insufficient information was provided by the representative to permit the firm to make an adequate determination as to whether to allow a proposed OBA or PST to proceed.
- OBA and PST Notice Reviews – FINRA cited a lack of oversight leading to exposures in some firms’ OBA and PST reviews. It noted that a number of firms lacked written supervisory procedures for such reviews or the procedures in place were inadequate. And even when some firms did have well-designed procedures, they executed them poorly. Most commonly, these firms failed to retain supporting documentation or executed their reviews with sufficient depth.
- Post-PST Approval – Once firms approved PSTs for compensation, FINRA noted that some failed to supervise the activity effectively because they did not fully understand it. Or they again failed to retain necessary documentation to demonstrate their compliance with the supervisory obligations. Or, because PSTs can take many forms, they couldn’t adequately record the transactions on their books. Still others failed to monitor such PST limitations as the prohibition on a registered representative soliciting firm clients to participate in the PST.
What else did FINRA’s 2017 Examination find?
- Cybersecurity programs could be better. FINRA recommended firms consider improved access management, particularly for terminated or departing employees; ongoing risk assessments, better vendor management to ensure cybersecurity preparedness, stronger branch office oversight, among other exposure remedies.
- Anti-money laundering compliance could be stronger. FINRA cited a lack of policies and procedures to detect and report suspicious transactions.
- Commitment to product suitability oversight. FINRA identified failures on the part of firms to adequately ascertain member recommendations to customers are appropriate for that customer.
- Best execution focus. FINRA noted some failures to execute orders in a manner most advantageous to the customer.
- Improved market access controls. FINRA suggested that firms could do a better job of establishing pre-trade financial thresholds, implementing and monitoring aggregate capital or credit exposures, and tailoring erroneous trade controls.
The report is an aggregate of FINRA’s 2017 examination findings that the Authority hopes will be seen as a resource that firms can use to strengthen their compliance with securities rules and regulations…which begs the question…
How can firms be more FINRA-compliant?
First step, of course, is to “do the right thing.” Fines and penalties are an unnecessary and costly expense. Especially when those expenses can be attributed to easily correctable errors and omissions – like JP Morgan Securities, LLC’s recent $1.25 million fine for failing to adequately fingerprint or screen its employees…Or Wells Fargo Broker-Dealers $3.4 million restitution payout…Or Morgan Stanley’s $13 million sanction…
Compliance does not have to be overwhelmingly hard or wildly expensive. Really. It can be. We’ve built a business on helping organizations stay on the “straight and narrow” efficiently and cost-effectively. So let’s talk. Call 212-233-1155 to ask about Patrina’s cost-effective and comprehensive, 8-module compliance solution, and compliant data capture, file storage, and records archiving specifically designed for the financial services community. Be smart. Be covered.