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Regulation and Compliance > Federal Regulation > FINRA

FINRA’s Top Exam Priorities for 2016

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Coinciding with the expected release early this year of the Department of Labor’s rule to rein in brokers’ conflicts, such conflicts of interest will also be a top exam priority for the Financial Industry Regulatory Authority in 2016.

“We completely agree with DOL that those [BD] conflicts are real and they need to be addressed, and that firms have failed in managing their conflicts on too many occasions,” Richard Ketchum, FINRA’s chairman and CEO, told ThinkAdvisor in a Tuesday interview to discuss the release of the self-regulator’s 2016 regulatory and exam priorities.

FINRA also said that it would focus heavily on a firm’s compliance culture, noting that the self-regulator will “assess five indicators of firm’s compliance and supervision culture” in 2016.

FINRA also noted in its report that while fines levied in 2015 were $93.9 million, a drop from the $134 million in fines levied in 2014, restitution secured by FINRA last year increased nearly threefold, to $96.2 million from $32.3 million in 2014.

A lot of the bump in restitution secured last year can be attributed to “breakpoint settlements,” in which firms failed to give appropriate breakpoint discounts, Ketchum said.

While Ketchum noted that FINRA “disagreed in details” with the DOL’s proposed fiduciary rule and “tried to provide constructive comments that identified potential changes, [FINRA] certainly agrees with the basic concern that firms have to be able to manage their conflicts that relate to compensation incentives,” he said. “That’s a huge focus on our program.”

Specifically, brokers’ conflicts as they relate to “both the provision of advice and the recommendation of products to customers” as well as the differential commissions/incentives that their registered reps receive “are a real concern,” said Ketchum, who could retire as early as this summer.  

He noted the potential problems that can crop up in the sale of proprietary products as well as the sale of “higher-commission products — whether that be in higher cost mutual funds or the traditionally higher cost products like direct REITs and private placements.”

BDs’ conflicts are “front and center for a lot of reasons,” Susan Axelrod, FINRA’s executive vice president of regulatory operations, agreed during the interview. Since releasing its priorities list in 2013, conflicts of interest — particularly as they relate to the sale of products and compensation — have been a focus for FINRA, she said. 

She noted that FINRA expects to complete this year its targeted exams of brokers’ incentive structures and conflicts of interest in connection with firms’ retail brokerage business.

The review encompasses firms’ conflict mitigation processes regarding compensation plans for registered reps, firms’ approaches to mitigating conflicts of interest that arise through the sale of proprietary or affiliated products, or products for which a firm receives third-party payments (e.g., revenue sharing).

FINRA also filed late in 2015 for SEC approval its Rule 2273, which would require member BD firms to provide an educational communication in connection with member recruitment practices and account transfers.

Ketchum said that while he would prefer to hand over his CEO duties in the summer, he will stay on until the FINRA Board’s search for a new CEO is completed. The board’s search process—which is internal and external — started in December, and it “tends to be a multi-month process,” he said. So any news on a replacement wouldn’t come till spring, “at the earliest.”

While other regulatory and exam priorities for FINRA include protecting seniors and other vulnerable investors as well as issues such as supervision, risk management and controls — with a focus on anti-money laundering and cybersecurity — as well as liquidity, Ketchum also said that BDs should expect rule proposals reflecting the recent recommendations put forth by the self-regulator’s arbitration task force.

The task force “did a terrific job in identifying some hands-on steps that can improve the arbitration process,” Ketchum said, noting that he’s particularly “enthused about trying to move forward with a discrete, elite group of arbitrators to hear [brokers’] expungement repeals, given the importance of making sure those decisions are done correctly.” He said to expect FINRA to release by midyear some rule proposals based on the arbitration task force’s 51 recommendations.

Other areas of priority for FINRA in 2016 include:

  • firms’ monitoring of excessive concentrations and recommendations, particularly regarding complex, speculative or illiquid products;
  • private placements and Regulation A+ offerings;
  • fixed income securities, including excessive charges;
  • market integrity, including the Vendor Display Rule, market access, fixed-income order handling, Regulation SHO, and manipulation across markets and products; and
  • financial and operational controls relating to exchange-traded funds and fixed-income prime brokerage.

Brian Rubin, partner with the law firm Sutherland Asbill & Brennan in Washington, notes BDs’ concern — once again — with the length of FINRA’s priorities list. BDs, he said, question whether FINRA is highlighting “too many” priorities. “The more issues that FINRA cites may mean that firms will have less time and fewer resources to focus on each issue,” Rubin said.  However, “the length of this year’s letter, which is 13 pages, is an improvement over last year’s 17-page letter.”

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