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.

Because of lax supervision, Finra found that reps at some firms were recommending complex investment strategies, such as options strategies, to customers who did not have the sophistication to understand what they were buying and what it could cost them in terms of lost principle.

The real culprit is broker-dealers’ lax or nonexistent supervision, Finra said throughout the report.

Finra examiners found that some firms just did not have reasonably designed branch supervision and inspection programs. In particular, some firms did not adequately understand the activities that were being conducted through their branch offices, including products and services offerings, which could prevent such firms from effectively supervising and addressing the unique risks of each branch location.

Many firms also did not conduct periodic inspections of non-branch locations as required by Finra regulations, so they didn’t monitor the “nature and complexity of the products and services offered or any indicators of irregularities or misconduct,” Finra examiners found.

At the same time, even firms that did do branch inspections failed to use the findings and “did not follow through on corrective action determined to be necessary through their branch inspections,” the regulator found.

Finra examiners also found that B-Ds aren’t adequately supervising reps’ creation of their own “consolidated” account reports (CARs) and other forms, which make it easy for rogue brokers to hide fraud and poor investment performance.

“In certain instances, firms did not have supervisory systems to evaluate whether and when registered representatives used CARs, did not know when CARs included manual entries by representatives or customers, and did not require review of relevant customer documents to confirm that CARs accurately represented customers’ assets and values that were held outside the broker-dealer,” Finra said.

Some firms also didn’t have reasonable processes in place to detect or prevent various forms of forgeries and falsified documents, Finra examiners reported. That means these B-Ds can miss “accommodation forgery,” where reps and associated persons asked customers to sign blank, partial or incomplete documents, Finra warned.