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Regulation and Compliance > Federal Regulation > FINRA

FINRA Head Calls For Scrutiny Of "Wealth Event" Sales

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Financial services company supervisors should look carefully at sales involving money that came from an inheritance or a retirement plan cashout, according Financial Industry Regulatory Authority Chairman Richard Ketchum.

Ketchum spoke Wednesday in Baltimore at an annual conference organized by FINRA, Baltimore.

Ketchum talked about FINRA’s ongoing battle over companies and sales representatives ensuring that the variable annuities sold to consumers suit the needs of the consumers.

FINRA put a VA sales practices rule into effect in mid-2008.

Since then, “we have uncovered inadequate compliance policies and procedures,” Ketchum said, according to a written version of his speech posted on the FINRA site. “We also have found that some firms failed to obtain customer information, such as information about customers’ liquidity needs and tolerance for risk.”

In some cases, Ketchum said, FINRA has encountered unsuitable sales recommendations.

“Some of the things you should be looking for with your compliance reviews are a justification for numerous switches by the same broker,” Ketchum said. “You should also look for patterns like sales to seniors, same riders for many customers and policy lapses.”

In the future, Ketchum said, he wants FINRA member firms to pay more attention to “wealth events,” such as the death of a parent or spouse or retirement, that lead to an individual getting a large sum of cash.

Those events “fundamentally change the way investors interact with their broker or financial adviser,” Ketchum said.

“When investors find themselves in such an event, an advisor’s first reaction may be to recommend selling everything and starting over, which of course, generates a lot of commission fees–but hardly ever is the best course of action,” Ketchum said.

“That’s why I believe these ‘wealth events’ need to be proactively supervised more closely,” Ketchum said. “They need to be on senior management’s radar screen, not simply as a revenue opportunity, but as a crossroads moment with a client. Similarly, these events need to be a particular focus of your compliance reviews. Where there is greater risk and incentives, there has to be greater attention.”


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