The Financial Industry Regulatory Authority warned broker-dealers Thursday to prepare for heightened scrutiny this year in a host of areas, namely of their recommendations on IRA rollovers, private placements and complex products like nontraded REITs.
FINRA highlights in its exam priorities letter that it will also create this year a dedicated enforcement team under its High Risk Broker initiative to prosecute brokers who have a pattern of sales practice abuses. FINRA barred 16 such brokers in 2013.
Susan Axelrod, FINRA’s executive vice president of regulatory operations, encouraged firms to use the guidance “along with their own analysis” to enhance their compliance programs as FINRA “will be examining for strong controls and robust compliance efforts in these areas.”
Richard Ketchum, FINRA’s chairman and CEO, said in the same statement that by providing “detailed guidance to firms, we hope to not only support firms’ compliance efforts but also to alert firms to the issues we have identified as the most salient risks to investors and the integrity of our markets.”
FINRA notes that its areas of concern include conflicts of interest, fraud, how firms handle liquidity risk, and high-frequency and algorithmic trading, and that the self-regulator “will update its view on risks throughout the year.”
Cipperman Compliance Services notes that while FINRA’s exam priorities letter helps firms by highlighting FINRA’s new focus areas (interest-rate sensitive securities, recidivist brokers), “every year the list just gets longer because FINRA never really drops any of the old topics off the list (for example, anti-money laundering, customer data protection, conflicts of interest).”
Products to Watch
FINRA says that it will examine the suitability of recommendations to retail investors for complex products, which include structured products, like leveraged exchange-traded funds; interest-rate sensitive investments, like long-duration bond funds and muni securities; nontraded real estate investment trusts; frontier emerging-market funds; and mortgage-backed securities.
Qualified Plan Rollovers
FINRA also says that in 2014, reviewing firms’ qualified plan rollover practices will be an examination priority, and that staff will examine firms’ marketing materials and supervision in this area. FINRA will also evaluate securities recommendations made in rollover scenarios to determine whether they comply with suitability standards in FINRA Rule 2111.