Brokers beware; FINRA is watching your firm, and you. Becoming embroiled in a regulatory inquiry or investigation can become a major and costly headache and impediment to registered representatives’ business.
In January 2016, the Financial Industry Regulatory Authority (FINRA) released its annual list of priorities, showing what sorts of sweeps they may perform, and investigations they may bring, in the coming year. brokers working in the securities industry should be aware of the priorities that are relevant to them, including those having to do with sales practice.
FINRA’s 2016 Priorities make clear that they intend a top-down review of the following areas, which may lead to firm-wide or broker specific investigations, including:
- Suitability – FINRA seems particularly concerned about complex, speculative, interest-sensitive or other alternative products. FINRA cited that some firms rely too heavily on third-party information and sometimes don’t perform the necessary due diligence or education of their employees that are generally required by industry rules.
- Concentration – Related to suitability of alternative products is the necessity to monitor and supervise concentration in customers’ accounts of these often risky and speculative products. FINRA notes that some firms have deficient systems to monitor and ensure suitable recommendations are being made.
- Senior and Vulnerable Investors – FINRA has steadily increased its monitoring and enforcement to further protect seniors and other vulnerable investors. FINRA noted in the 2016 Priorities that it has seen instances of fraud and abuse of seniors, including people using a position of trust to gain control over elderly investors’ assets.
- Sales Charge Discounts and Waivers – FINRA noted that they brought several enforcement actions in 2015 and obtained large fines of firms, including firms who failed to apply eligible volume discounts, sales charge waivers for mutual funds, unit investment trusts (UITs), non-traded real estate investment trusts (REITs) and business development companies (BDCs).
- 529 College Savings Plans – These accounts are generally opened by investors who wish to create tax-deferred accounts to help save for minors’ education. Class A shares are often more economical than Class C shares. Despite this, FINRA stated that it has observed relatively large purchases of Class C share purchases. FINRA made clear that they expect firms to perform suitable due diligence to determine that 529 Plan share classes are appropriate for each customer.
- Private Placements, JOBS Act and Public Offerings – FINRA disclosed that they will be investigating to ensure that proper disclosures are made by firms, be it to the general public in Regulation A+ offerings, or to retail investors who are recommended private placements, non-traded REITs, Direct Participation Programs (DPPs) and BDCs.
- Outside Business Activities (OBAs) – FINRA noted that they regularly see that firms do not properly assess disclosures made by registered representatives of their OBAs. FINRA will be investigating firms’ policies and procedures to determine if conflicts are created by OBAs and whether they must be treated as private securities transactions.
These 2016 Priority items may begin with a sweep or inquiry by FINRA to the broker-dealer firms, but may also be initiated directly with registered representatives or financial advisors. Generally, FINRA’s first contact would be by issuing an 8210 Request. Just receiving an 8210 Request does not mean you have done anything wrong. As we have explained in prior blog posts, 8210 Requests raise real issues for the licensed individual. First, you must respond to the Request, or risk losing your securities license. Second, while your firm may offer to represent you, it is imperative that you determine whether the firm actually represents your best interests. We regularly represent registered individuals before FINRA through the 8210 process.
The Attorneys at Malecki Law are experienced with and regularly represent clients who have become embroiled in regulatory investigations. We have obtained favorable results for our clients, including settlements and declarations of no action taken by regulators. Contact us for a free consultation. Various hourly-billing and flat-fee based options are available to make smart decisions from inception to the completion of your matter.