More On Legal & Compliancefrom The Advisor's Professional Library
- Trading Practices and Errors When SEC-registered investment advisors conduct annual audits of firm policies and procedures, they should pay close attention to trading practices. Though usually not required to, state-registered advisors should look at their trading practices and revise policies that do not fully protect clients.
- Regulatory Oversight of Investment Advisors Although the regulatory environment is in a state of flux, it is imperative that RIAs adhere to their compliance obligations. To ensure compliance, RIAs and IARs must fully understand what those obligations are.
The Financial Industry Regulatory Authority is on pace to file “a record number of cases this year,” with top compliance failures in the areas of suitability, cybersecurity and anti-money laundering, according to the self-regulator’s chief of enforcement.
“FINRA enforcement continues to have a strong caseload, with a record number of cases on the same pace this year as last,” Brad Bennett, FINRA’s chief of enforcement, told attendees at FINRA’s annual conference in Washington on Wednesday.
As of March 31, FINRA had handed out 306 disciplinary actions, levied a total of $8.5 million in fines and ordered firms to pay $1.9 million in restitution. The self-regulator has also barred 59 reps, expelled three and suspended 128.
FINRA’s newly implemented risk-based exam program is “taking hold,” Bennett said, and “while the number of cases has remained constant the fines are tailing off a bit.” FINRA continues to see a “significant” number of single broker malfeasances, including petty theft, dishonesty, forgery and failure to report on their U-4, he said.
Bennett also noted that FINRA is “seeing the end” of cases related to the 2008 financial crisis.
Susan Shroeder, FINRA’s deputy in charge of its New York operations, was on hand to talk about the areas where FINRA was seeing the most problems. First, she said, was in the area of complex or structured products—a priority area for FINRA. “We’ve seen an increase in the sales of these to retail consumers and the top issue is reasonable basis suitability,” she said.
Another area, Shroeder said, where “things can go wrong” in the sales of these complex products is the “customer specific suitability issue, where we see overconcentration problems.” For instance, she said, “so many states have concentration rules and many private placements have concentration requirements.” The third area where things can go wrong, she said, is in the “provision of information about complex problems, which is keeping up with and providing current and accurate data.”
Another problem area for FINRA, Schroeder said, has been in cybersecurity. As it stands now, FINRA’s enforcement division is handling more than 100 wire-hacker cases, she said. In some of these cases, “a customer’s email gets hacked and then the hacker reaches out to the customer’s broker and asks for a wire transfer to be sent” to a bank account. She said FINRA Regulatory Notice 12-05 addresses the cybersecurity issue.
Schroeder said that FINRA’s enforcement division was also prioritizing “the culture of compliance,” which she deemed as “more of an approach” than a product. “We see firms with a constellation of compliance violations, and we look at the overall supervisory structure and its senior supervisors, whether they contribute to a culture of compliance or one of deficiencies,” she said.
Finally, Schroeder said FINRA was seeing “a lot” of anti-money laundering violations. Some of the recent AML cases were levied because firms had failed to tailor the AML program to the firm’s business model.
On May 8, FINRA fined three firms a total of $900,000 for failing to establish and implement adequate anti-money laundering programs.