BDs’ Top 5 Biggest Compliance Failures: NASAA

Best Practices:

Correspondence.
Correspondence, both electronic and hard copy, must be effectively monitored by the BD. This includes a system of capturing and maintaining electronic, business-related correspondence sent by sales staffers from websites and social network service providers outside the firm. For additional guidance, refer to FINRA Notice 11-39.

Advertisements. Advertisements and sales literature MUST be fair and balanced and MUST be approved by the BD and/or FINRA. Seminar notices/advertisements, programs, seminar materials utilized, and guest speakers must be approved by the BD. In instances where brokers routinely conduct seminars, a supervisory representative of the firm should randomly attend the seminar for compliance purposes.

Top violation category No. 2: Suitability

Best Practices:

Suitability. Broker-dealers must develop effective standards and criteria for determining suitability. State regulations and FINRA Rules 2090 and 2111 require registered persons to “know your customer” and receive training sufficient to demonstrate knowledge of products pre-sale.

Working with seniors. Baby boomers are moving into retirement, and as individuals age, cognitive abilities begin to wane. BDs and their registered representatives should develop procedures/best practices for handling accounts of “senior” investors. A number of recommendations relating to these best practices are contained in joint reports issued in 2008 and 2010 by NASAA, the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).

Top violation category: Failure to follow written supervisory policies and procedures

Best Practices:

Develop, update and enforce written supervisory procedures. BDs also should ensure that staffing and expertise are commensurate with the size of the BD, type(s) of business engaged in by the firm, and the individual responsible for specific procedures.

Selling away. BDs must ensure that adequate procedures are in place to address private securities transactions (selling away). If this activity is permitted, the firm’s written supervisory procedures should be adequate to monitor this activity on an ongoing basis. The BD’s procedures must have a mechanism to conduct a meaningful review of the request and in the instance where the request is denied, a process to determine the broker is/has not engaged in the activity.

Outside business activity. The firm should have a supervisory procedure in place to address its approval/denial process and a requirement that the broker promptly report any changes to the approved outside activity. Written outside business activity requests from brokers must be received, reviewed and approved by the firm prior to the activity. The BD and broker are required to report the outside business activity on the broker’s Form U-4. 

Exception reports. Introducing dealers should obtain the necessary exception reports from the clearing dealer to ensure proper compliance. Upon the generation of exception reports, all BDs must document and resolve “red flags” in a timely manner. BDs that rely solely upon conversations with brokers to address exception reports without contacting investors may subject themselves and supervisory staff to regulatory and/or legal action.