Brokers’ impermissible use of texting, messaging or using social media apps like Facebook, WhatsApp and WeChat to communicate with clients topped recent exam findings in the Financial Industry Regulatory Authority’s just-released 2019 Report on FINRA Examination Findings and Observations.
FINRA states that its report reflects key findings and observations identified in recent exams, and contains “effective practices” that could help firms improve their compliance and risk management programs.
The findings and observations are summarized for a range of topics, including supervision, cybersecurity, best execution, segregation of client assets, and Uniform Transfers to Minors Act (UTMA) and Uniform Grants to Minors Act (UGMA) accounts.
“Our position as a self-regulatory organization affords us the unique opportunity to provide firms with resources that help them more easily comply with rules and regulations and protect investors — and this report aims to do just that,” said Bari Havlik, FINRA’s exam chief, in releasing the report Wednesday. “We hope firms find the Exam Findings and Observations Report useful in strengthening their own control environments and addressing potential deficiencies before their next exam.”
The report states that while some broker-dealers prohibit the use of texting, messaging, social media or collaboration applications (e.g., WhatsApp, WeChat, Facebook, Slack or HipChat) for business-related communication with customers, the BDs failed to “maintain a process to reasonably identify and respond to red flags” that registered reps were using impermissible personal digital channel communications in connection with firm business.
Some registered reps have also been conducting “electronic sales seminars” in chat rooms or on digital channels that were not permitted by their firms and were outside of supervision or recordkeeping programs, the report states.
The report also found that broker-dealers failed to maintain a supervisory system reasonably designed to assess the suitability of recommendations that customers exchange certain products, such as mutual funds, variable annuities or unit investment trusts (UITs).
“In particular, some firms did not maintain blotters or other processes to identify patterns of unsuitable recommendations of exchanges involving long-term products,” the report states.
Some broker-dealers’ supervisory systems were also not reasonably designed or used to detect red flags of possible unsuitable transactions.
For example, FINRA’s report states, “some firms did not identify or question patterns of similar recommendations by representatives or branch offices across many customers with different risk profiles, time horizons and investment objectives. In some instances, several customers of a representative or branch office appeared to have made ‘unsolicited’ transactions in identical securities, which could raise questions around whether the transactions were actually ‘unsolicited.’”
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