Fiduciary Duty - Putting Customers First - Tops FINRA's Regulation Priorities for 2015

Attorney Advising Disclaimer

FINRA announced its priorities for 2015 in its industry-wide Regulatory and Examinations Priorities Letter, addressing issues that FINRA have encountered before alongside new areas of focus for the 2015 calendar year.

In identifying recurring challenges, FINRA considered problems that have repeatedly cropped up in customer complaints, regulatory decisions, and past notices.

Leading FINRA's list is a concern that firms are failing to put customer interests first. The regulator identified several key factors that may compound this issue—failing to consider the customer's best interests when dealing with elderly or vulnerable investors, major liquidity or other significant event.

>> Firm culture can make or break a brokerage's ability to put customer interests first. For instance, overaggressive pursuit of short-term profits or rapid growth may be at odds with certain investors' moderate or conservative investment objectives, which may create ethical dilemmas for registered representatives. Brokers under pressure to conform to a firm culture that doesn't fit a particular customer's needs can result in a failure to put the customer first, just as a rogue broker who goes against a positive firm culture can create unnecessary risk.

>> Supervision procedures and other risk management controls puts a customer first by taking the extra steps to safeguard assets and interests. Many 2014 regulatory actions contained the charge of "failure to supervise" or "lack of adequate supervisory procedures," which are FINRA violations because these steps protect against both inadvertent and deliberate harm to customers.

>> Product and service offerings can cause harm when the products are too complex, opaque or insufficient for investors' needs. For instance, products that are so complex that brokers don't fully understand them open up an investment to unnecessary risk.

>> Conflicts of interest is an obvious factor that hurts investors, but appears in FINRA's "recurring challenges" list because of how pervasive the issue is in regulatory actions. With continued disciplinary actions and complaints concluding that firms have failed to adequately address conflicts of interest, FINRA saw fit to once again include the issue in its yearly priorities letter.

FINRA additionally highlighted its areas of focus in 2015, identifying sales practiceissues as key topics for the upcoming year.

Sales Practice Issues

> Products that FINRA specifically identified as causing concern include interest rate-sensitive fixed income securities, variable annuities (VAs), alternative mutual funds or liquid alts, non-traded real estate investment trusts (REITs), exchange-traded products and funds (ETPs and ETFs), structured retail products such as notes, floating-rate bank loan funds, and securities-backed lines of credit (SBLOCs). FINRA's big concern with these products concern how the more complex ones—such as VAs, REITs, ETFs and structured notes—are being marketed, solicited and sold. 2015 marks the second consecutive appearance in the yearly priorities letter for interest rate-sensitive products (such as high yield bonds or mortgage-backed securities) and REITs.

> New Supervision Rules became effective in December 2014 and made the list because of FINRA's continued interest in managing harm to customers (see Supervision, above).

> Individual Retirement Account (IRA) Rollovers and other wealth events corresponding to a decision about what to do with a large amount of money is a topic of concern because IRAs are becoming more common and play a growingly important role for many investors.

> Excessive Trading and Concentration Controls may well be related to both the recurring challenge of supervision and conflicts of interest, as a sizable portion of FINRA's regulatory actions citing excessive transaction activity have cited conflicts or interest as motive and lack of supervision as a missed opportunity to prevent the misconduct.

> Private Placements appear on FINRA's list primarily because the regulator is concerned that in some cases, brokers are not performing a sufficient level of due diligence and suitability analyses on these diverse products.

> High-Risk and Recidivist Brokers are financial professionals with unscrupulous pasts, such as a high level of previous regulatory actions or brief stints at many firms that have gotten into trouble with FINRA. In its priorities letter, FINRA vowed to pay "rigorous regulatory attention" to those firms hiring high-risk brokers.

> Although Sales Charge Discounts and Waivers are often prescribed by industry rule, FINRA noticed that customers sometimes do not received discounts and waivers they are entitled to when purchasing products like non-traded REITs and unit investment trusts.

> With the population of Senior Investors set to grow to 56 million by 2020 and 73 million by 2030, FINRA turned its sights onto issues of elder abuse and unsuitable investment advice for seniors. For instance, senior-directed seminars and presentations must be "fair, balanced and not misleading."

> Anti-Money Laundering (AML) violations occur when firm surveillance and supervisory systems are deficient and fail to detect potentially suspicious transactions, such as transfers and conversions of funds, and involve red flags that many indicate market manipulation, insider trading, and microcap fraud. Like supervisory deficiencies, AML violations have shown up in several key regulatory actions over the past few years.

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