In its annual list of hot exam items, the Financial Industry Regulatory Authority warned broker-dealers that it would be zeroing in on a host of areas this year, namely brokers’ recommendations on IRA rollovers, private placements, complex products as well as products sold to older investors.
Two of the most prominent exam priorities are IRA rollovers and FINRA’s intention to create 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 recidivist brokers in 2013.
FINRA said that reviewing firms’ qualified plan rollover practices will be a priority in 2014, 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 under FINRA Rule 2111.
A recent Investment Company Institute study found that from 1996 to 2008, more than 90% of funds flowing into traditional IRAs came from retirement plan rollovers.
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FINRA said that it shares the Government Accountability Office’s concerns that investors may be misled about the benefits of rolling over assets from a 401(k) plan to an IRA. In its Regulatory Notice 13–23, FINRA warned firms and associated persons not to make claims of “free IRAs” or “no-fee IRAs” where investors do pay costs associated with these accounts.
In Regulatory Notice 13–45, released in December, FINRA reminded firms of their responsibilities concerning IRA rollovers. FINRA said that it issued the notice to remind firms of their responsibilities when recommending a rollover or transfer of assets in an employer-sponsored retirement plan to an IRA, or when marketing IRAs and associated services.
IRAs and Conflicts of Interest
Dale Brown, president and CEO of the Financial Services Institute, said that FINRA’s increased focus on IRA rollovers “is tied to their interest in the industry’s management of conflicts of interest.” FINRA, he said, “is not prohibiting advisors from rollovers into an IRA that pays fees to the advisors, but rather reminding firms to be diligent in monitoring those situations and ensuring advisors inform investors of all their rollover options.”
Brown said FSI’s broker-dealer members are already aware that the conflicts associated with rollovers is an issue and have been monitoring it. FSI itself, he said, supports FINRA rules and guidance that “effectively increases investor protection without limiting access to financial advice.” Brown said FSI doesn’t think investors “should have to be regulatory experts to know that their advisor is working in their best interest.”
Susan Axelrod, FINRA’s executive VP of regulatory operations, said in a statement that the 2014 exam letter provides “insight to the industry on specific areas of concern for our regulatory programs in the coming year.” Axelrod 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 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.”
Structured Products, Private Placements
As for structured products, FINRA said that it will examine the suitability of recommendations to retail investors for complex products, including structured products with interest rate sensitivity, private REITs, frontier and emerging-market funds, mortgage-backed securities, long duration bond funds and municipal securities.