The Financial Industry Regulatory Authority announced today that it will be targeting online sales practice violations at broker-dealers that distribute securities through online platforms -- their own or a third-party’s -- while claiming they aren’t selling securities.
In fact, broker-dealers online sales practices -- and lack of compliance -- is one of the leading examination priorities the regulator announced today in its 2019 examination and risk priorities letter, an annual missive designed to provide firms with a compliance blueprint and key insights into what to expect from Finra monitoring and examinations in the coming year.
“Finra is concerned that some member firms assert they are not selling or recommending securities when involved with online distribution platforms despite evidence to the contrary, including handling customer accounts and funds, or receiving transaction-based compensation,” Finra said. “We will evaluate how firms conduct their reasonable basis and customer specific suitability analyses, supervise communications with the public and meet AML [anti-money laundering] requirements.”
Finra said it will also evaluate how firms address the risk of sales to nonaccredited investors and non-compliant escrow arrangements, as well as the risk of excessive or undisclosed compensation arrangements between firms and issuers.
How firms address the risk of offering documents or communications with the public that omit material information or may contain false or misleading statements, or promissory claims of high-targeted returns, will also come under the microscope, the regulator said.
While Finra revealed its new priorities, that doesn’t mean that the regulator will not be diligently monitoring all firms’ sales practices, Finra CEO Robert Cook said.
“This year’s priorities letter takes a new approach by highlighting those topics that will be materially new areas of focus for our risk monitoring and examination programs in the coming year,” Cook said. “While we will continue to review and examine for longstanding priorities discussed in greater detail in past letters, we agree with the suggestion from many of our member firms that a sharper focus on emerging issues will help them better determine whether those issues are relevant to their businesses and how they should be addressed.”
Another new priority in 2019, given the stock market’s volatility, is fixed income markups and compliance with customer disclosure obligations, the regulator said. Finra released two rules regarding mark-ups and customer confirmations last summer.
“Finra will also review for any changes in firms’ behavior that might be undertaken to avoid their [fixed income] mark-up and mark-down disclosure obligations,” the regulator said.
As always, suitability will remain one of Finra’s top priorities and will include monitoring of: