FINRA's top exam priorities for 2016

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 our sister site, ThinkAdvisor, in an 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).