Some broker-dealers are missing a wide range of broker misconduct, including the sale of unsuitable, high-risk products and churning of customer accounts, because they aren’t supervising branches and registered representatives, according to Finra’s 2019 report on examination findings, released today.
The report presents key findings and deficits identified during recent Finra exams.
"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,” said Bari Havlik, Finra executive vice president of member supervision.
The new report focuses on a wide range of broker-dealer deficits that have been shown to impact retail investors, including firms' inadequate supervision of reps leading to excessive trading, forgeries and falsified account statements, and use of high-risk products such as options strategies in unsophisticated customer accounts.
Finra examiners found that some firms lacked adequate supervision to ensure that reps’ recommendations were suitable in light of a customers’ financial profiles or to detect red flags indicating harmful transactions.
“Some firms did not identify or question patterns of similar recommendations by representatives or branch offices across many customers with different risk profiles. ... 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,” the report said.
Finra examiners also found instances where registered reps unilaterally changed account information, such as customers’ income, net worth or account objectives.
“In many instances, the changes preceded or were contemporaneous with one or more transactions that, but for the account change, would have been subject to heightened supervisory scrutiny, raised suitability concerns or would not have been approved,” the regulator said.
Finra also found that some broker-dealer supervisors failed to supervise and recognize when a pattern of transactions rendered the series of recommendations unsuitable.
Finra also noted that some firms did not adequately train supervisors how to use exception reports to identify red flags indicative of excessive trading.