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.