This month, the Financial Industry Regulatory Authority (FINRA) issued a report summarizing various findings from recent examinations of its member firms (Report). In particular, the Report sets forth selected observations from recent examinations that FINRA considers worth highlighting because of their potential significance, frequency and impact on investors and the markets. The Report also describes compliance and supervisory practices that FINRA has observed to be effective in certain circumstances.

The Report’s high-level observations include, but are not limited to, the following:

  • Suitability issues, including situations where registered representatives did not adequately consider an individual retail customer’s financial situation and needs or other investment profile factors when making recommendations, recommendations involving overconcentration in illiquid securities that resulted in significant customer losses, failures to identify and prevent excessive trading in customer accounts, unsuitable variable annuity recommendations, and failure to conduct appropriate due diligence on volatility-linked products and other complex products;
  • Failure by firms to provide required transaction-related information to customers for certain trades in corporate, agency and municipal debt securities;
  • Firms failing to conduct reasonable diligence on private placements (which typically should entail meaningful independent research on material aspects of the offering, identification of red flags and addressing concerns that would be relevant to a potential investor) and/or over relying on third parties to conduct due diligence;
  • Lack of sufficiently robust supervisory controls and procedures to prevent abuses of authority by registered representatives exercising discretion on behalf of customers;
  • Firms not properly documenting investigations of potentially suspicious activity flagged by exception reports;
  • Non-compliance with the net capital rule, including failing to sufficiently document expense-sharing agreements, taking incorrect inventory haircuts and miscalculation of operational charges;
  • Non-compliance with the customer protection rule, such as improper use of customer fully-paid and excess-margin securities to fund firm operations and inaccurate reserve formula calculations;
  • Firms permitting staff members who are not properly registered as Operations Professionals to engage in activities such as approving general ledger journal entries, supervising financial functions and/or approving business requirements of trading systems related to covered functions;
  • Firms lacking adequate supervisory programs relating to, or otherwise failing to comply with, confirmation disclosure requirements (e.g., inaccurate disclosure of the firm’s trading capacity, mislabeled disclosure of compensation and failure to disclose market maker status);
  • Failure to maintain sufficient written supervisory procedures and controls regarding registered representatives’ use of “doing business as” names;
  • Best execution obligation violations, including with respect to firms allowing conflicts of interest relating to financial benefits from routing orders to particular venues to adversely affect the objectivity of the firm’s “regular and rigorous” review of customer execution quality;
  • Non-compliance with TRACE reporting rules in connection with institutional sales of fixed income securities; and
  • Insufficient market access controls by firms that provide market access to their customers, including with respect to intra-day adjustment of pre-trade financial thresholds and oversight of third-party vendors.

For more complete coverage of topics addressed in the Report, and greater detail on the topics addressed above, the full FINRA Report is available here.