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FINRA and SEC Look to Build Bridges

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Keeping the lines of communication open between broker firms and the regulating agencies of the Financial Industry Regulatory Authority and the Securities and Exchange Commission formed the basis of the recent Chief Compliance Officer Outreach BD national seminar in Washington.

At the March 7 meeting (the first of 14 such meetings), FINRA and SEC participants underscored the benefits of building successful relationships with member firms, ones that even evolved during the examination and acquisition processes, and favoring business cultures where compliance is a priority of top management. The mantra of open dialogue and building bridges is often fodder for such seminars, even as participants are concerned they will raise red flags and prompt auditors to descend on their firms for a sweep to end all sweeps. Not to worry. But you do have to worry about, and carefully monitor, new products while managing conflicts of interest, leakage of information, and sales methods to seniors, among other concerns, regulators warned.

If you haven’t already, establish a good e-mail retention system, counseled Hans Reich, director of FINRA’s New York region. Indeed, fellow New York region regulator Bob Sollarzo of the SEC advises spending plenty of time reviewing instant messaging and email reviews for leaks of information and to chart excessive or suspicious communications. The SEC will, if you don’t.

Leakage of information to clients and other personnel are a subject of recent deficiencies found at firms, Sollarzo noted. The SEC is also looking at preferential treatment given to customers that may point to illegal practices. A good information barrier between research and trading desks should also be a focus as the SEC is finding instances of a lack thereof at both big and small firms.

An area of concern for the regulators is conflicts of interest, and an entire panel was dedicated to trying to define and prevent conflicts.

The SEC has seen possible preferential treatment with IPO share allocations to an affiliated hedge fund group, where the group then flips the securities and favorite customers get to front-run an order first, Sollarzo said. He is also concerned with how brokers are compensated for certain services, and whether these costs are being passed down to the customer.

Another area of keen interest, reiterated by regulators from both agencies, is product sales to senior citizens. It is an area of major focus, a FINRA spokesman noted, and FINRA has a number of sweeps underway investigating the possible misuse of professional designations and other techniques in marketing to seniors, an area of particular interest to FINRA CEO Mary Schapiro, he said. FINRA is also looking at ways to reach seniors to educate them on how to arm themselves against unsavory tactics, particularly in the use of direct mail solicitations.

Participants voiced concern that reps are not able to gauge an individual’s cognitive decline, and are worried about being held accountable for a situation in which they do not have any clear guidelines, a concern voiced by the CCO of Wachovia Securites, Brian Underwood.

Lori Richards, the SEC’s compliance and examinations director, told Investment Advisor that this is one of the most difficult issues facing her office, and that she is soliciting input from the industry on developing best practices in this area. The Office of Compliance, Inspections and Examinations (OCIE) hopes to compile a report, she said, with FINRA and the state securities regulators (NASAA), in time for the next Senior Summit in September, she said. (See:

As a possible action, Richards pointed to the earlier suggestion of LaRae Bakerink, CCO and CEO of a San Diego firm, WBB Securities, LLC, who recommended the B/D firm inform the heirs of a client who may be slipping in cognition of the potential problem.

Other emerging sales practice issues include employees wearing the two hats of broker and advisor, and selling products that are both securities and insurance, according to Robert Colby, deputy director of the SEC’s trading and markets division. It is necessary to disclose complex financial products in a way that both the brokers and the customers understand, he said.

The new FINRA exam will still be risk-based, perhaps even more so than the old NASD and NYSE exams, FINRA regulators said, and examiners will be reviewing brochures and sales materials to see if they are up to date, and reviewing escalation procedures in place if a supervisor sees something awry.

The seminar came at a time when the integration of NASD and NYSE rules is underway and feedback is encouraged. The two agencies are planning to tier some of the legacy rules to firm size and business model. FINRA itself is considering moving some rules toward a principles-based model, according to Schapiro. Schapiro, in a speech on “building bridges” aimed at seminar participants, encouraged opinions on the practical effects of rule proposals through the comment process.

The transformation of FINRA’s enforcement department is now complete, according to Schapiro’s statements to the group, and its integrated exam program is also up and running.

The creation of a single rulebook is still underway, as it is complex, Schapiro stated, but staff has reviewed legacy NASD and NYSE rules and categorized them into three groups: of rules that can move into the FINRA rulebook largely unchanged, such as procedural and marketplace rules; rules that are obsolete or duplicative and which FINRA will recommend eliminating; and rules that would benefit from being revised.

Regrouping the rules along subject matter lines is one of the changes anticipated, as well as making the rules clearer, she stated.

The SEC is following up with the national seminar with 14 regional CCOutreach broker/dealer seminars that will take place from April through July. (Detailed information about the seminars is available at

Elizabeth D. Festa is a freelance business writer based in Washington, D.C. She can be reached by e-mail at [email protected].


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