The Financial Industry Regulatory Authority will be focusing less on brokerage firms’ culture and conflicts of interest, and will be concentrating more on specific bad actors within firms.
 
Those were among several changes Finra made in its 2017 exam priorities letter, released Wednesday -- the first under new chief executive Robert Cook who took over last year for the retiring Rick Ketchum.
 
Under Ketchum, Finra had made firms’ overall supervisory culture a top priority. Finra’s review in this area covered conflicts arising from pay structures, proprietary products, recruiting incentives and investment banking and research.
 
In this year’s letter, though, Finra mentions conflicts of interest only in regards to obtaining best execution on trades.
 
Instead, Finra is focusing on the bad guys.
 
Exams “will devote particular attention to firms’ hiring and monitoring of high-risk and recidivist brokers,” the 2017 letter says, with the help of a recently established dedicated examination unit to identify these high-risk reps.
 
Finra will continue to focus on product suitability and concentration, especially with senior investors.
 
The 2017 letter says Finra’s dedicated helpline for seniors has exposed “troubling scenarios” of unsophisticated investors buying into sales pitches for speculative energy investments, structured retail products, leveraged and inverse exchange-traded funds, and non-traded REITs and BDCs.
 
Finra also remains concerned about the potential impacts from rising interest rates. The regulator said it will be looking for excessive concentration in long-duration fixed income instruments.
 
New to this year’s exam priorities is a promise to review of firms’ compliance with customer reserve rules for segregating customer assets.
 
Last year, the SEC fined both Merrill Lynch and Morgan Stanley over alleged violations of customer reserve rules. The SEC also announced an initiative to uncover additional violations within the industry.
 
Gone from the 2017 exam priorities are a focus on how firms outsource operational functions, and scrutiny on mutual fund and UIT sales-charge breakpoints.
 
That last item could be a relief to the broker-dealer community. Many broker-dealers have paid fines over the past several years for missing breakpoints on packaged products.