What Types of Misconduct Does FINRA Look For at Brokerage Firms?

FINRA has released its annual examination priorities letter. The letter identifies the specific areas FINRA will be focusing on when it conducts examinations of its member brokerage firms in the coming year. According to FINRA, the list is developed based on trends it has seen in the previous year, as well as concerns expressed to FINRA by brokerage firms, investor advocates, and other regulators. In 2017, FINRA has said it will pay particular attention to the following items, among other things:

High-Risk Brokers

Statistics show that brokers who have committed misconduct against customers are more likely to commit additional violations in the future. FINRA will closely examine the supervisory procedures of brokerage firms who hire or retain brokers with a significant history of prior sales practice complaints. Specifically, FINRA will be checking the adequacy of the firm’s procedures to detect and prevent future misconduct by recidivist brokers.

Elderly Investors

FINRA will be focusing on the suitability of recommendations by brokers that senior investors purchase speculative or complex products. In addition, FINRA has seen an increase of penny stock schemes involving boiler-room tactics by unregistered individuals targeting elderly investors. FINRA said it will look to see if brokerage firms contact elderly customers when the customer has placed an order to purchase speculative penny stocks in the customer’s online brokerage account.

Account Concentration

FINRA will check how brokerage firms monitor recommendations that could result in an overconcentration in a specific type of product or products tied to a specific industry.

Customer-Specific Suitability

FINRA will look to see if brokerage firms are monitoring the suitability of their brokers’ recommendations of complex, speculative products to unsophisticated investors. FINRA specifically identified leveraged and inverse exchange traded funds (ETFs), non-traded real estate investment trusts (REITs), and unlisted business development corporations (BDCs) as items requiring additional scrutiny.

Cybersecurity

FINRA will continue to monitor the ability of brokerage firms to keep its customers’ financial data safe. This includes the strength of passwords; data encryption; the security of portable devices such as flash drives and laptops; and the firms’ use of vendors.

The complete FINRA letter may be read here.