FINRA to Issue Exam Trouble Spots Report

Volatility ETFs and security-based letters of credit are among topics that come up frequently in exams; BDs continue DOL fiduciary compliance despite delay

FINRA CEO Robert Cook. FINRA CEO Robert Cook.

The Financial Industry Regulatory Authority is seeing trouble spots in volatility ETFs as well as security-based letters of credit, and the self-regulator is now working on a report describing issues FINRA has noticed when examining firms, Susan Axelrod, executive vice president of Regulatory Operations, said Tuesday.

Axelrod, speaking on a panel about top regulatory concerns at FINRA’s annual conference in Washington, said that FINRA CEO Robert Cook has asked “us to get out a letter on what we’ve seen on exams,” adding that “we’re working on this now.”

Indeed, Cook said during his Wednesday speech at the event that a new "exam findings report" is on its way. "You all get an individual report after any FINRA exam of your own firm. But we have often heard that it would be useful to learn more about what FINRA is seeing through its examination programs more broadly," Cook said.

Later this year, FINRA "will provide firms with a new report that will summarize key examination findings from across our programs, enabling you to use this information to strengthen your own control environment and address any potential deficiencies before your next exam," Cook added. 

Axelrod said Tuesday that "from a product standpoint, volatility ETFs have stood out as a product that should have shorter holding periods than we are seeing in customer accounts, which has raised some flags due to the nature of the product."

Another area of concern for FINRA: high-risk brokers. FINRA’s Board of Governors approved on May 11 what it called the “next step in FINRA’s ongoing initiative to strengthen controls on brokers with a history of significant past misconduct” as well as to ensure greater accountability for firms that choose to employ high-risk brokers.

FINRA said it soon plans to issue a Regulatory Notice seeking comment on the key proposals, which would strengthen protections for investors and range from additional disclosure on BrokerCheck to heightened supervision of brokers appealing disciplinary matters.

The current plans would expand sanction guidelines to enable adjudicators to consider more severe sanctions when an individual’s disciplinary history includes additional types of past misconduct. They also would allow hearing panels, in appropriate circumstances, to restrict the activities of firms and individuals while a disciplinary matter is on appeal.

“Data and analytics have helped to define” the high-risk broker program, Axelrod said Tuesday.

Noting that high-risk brokers really came into focus in 2014, Axelrod said that “over the past five years, 40% of the firms we have marked as high risk are out of business.”

Broker-dealers are also moving ahead in complying with the Department of Labor’s fiduciary rule despite its compliance date being delayed until June 9.

“I think it’s a little late for a delay [beyond June 9], but we’re hopeful [Labor Secretary R. Alexander Acosta will] make some changes,” said Kevin Miller of Securities America.

“We really haven’t stopped the preparations [to comply with the rule] with the delay,” Miller said, and “continue to move forward with documentation of recommendations … and because the rule is so close, continue to communicate with our advisors and the changes they need to be making.”

Bari Havlik of Charles Schwab & Co. said, too, that the firm is moving ahead with compliance, stating, however, her bewilderment that the “a rule this complex and meaningful … [is still] at this level of uncertainty so late in the game.”

Havlik opined that the rule’s best interest contract exemption “will likely get pulled or delayed, but we continue with compliance.”

Axelrod also noted that while FINRA does not have a cybersecurity rule, “we look at this [area] not for the issues, concerns or violations, but to get feedback and direct firms on where they can do a better job.”

FINRA has “observed lack of training around cyber and confidential information” among firms, she said.

She also urged attendees to “review who is entitled to get into a certain system. Review if they actually need to get into the system.”

Miller said Securities America has seen “an uptick” in cyber breaches in wire transfers, where fraudsters take over a client’s email account and request a distribution. “We don’t allow email wire transfers,” he said. “We haven’t lost any money, but we’ve seen an increase in attempts.”

--- Check out Former Vanguard CEO Brennan 'Bullish' on DOL Fiduciary Rule on ThinkAdvisor.

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