Finra issued warnings to broker-dealers about a host of bad behaviors it has found during its examinations of firms this year.
The Financial Industry Regulatory Authority issued the report on violations that were found the most frequently or that Finra said were the most impactful as a resource for other broker-dealers to help them avoid similar violations.
The suitability rule is one that Finra found numerous broker-dealers or their employees violating, the report said. The fundamental responsibility for firms and associated persons is to deal with customers fairly, including recommending suitable investors for clients. “Finra continues to observe unsuitable recommendations by associated persons to retail investors as well as deficiencies in some firms’ supervisory systems for registered representatives’ activities,” the report said.
Unsuitable recommendations involved complex products, such as leveraged and inverse exchange-traded products, Finra said. In some cases, they involved overconcentration in illiquid securities, variable annuities, switches between share classes and sophisticated or risky investment strategies.
Firms also were guilty of excessive trading in clients’ accounts. In other cases, firms did not have adequate controls in place to avoid errant behavior on the part of the employees. Finra noted the numerous violations of proper record keeping and warned broker-dealers to institute proper oversight.
Finra singled out broker-dealers' handling of variable annuities and non-traded REITs as areas that need better supervision. In addition, some firms that were required to meet the suitability standard for clients’ investments did not do due diligence on the investments to make sure they met the clients’ needs, particularly when investing in complex products like private placements. For instance, Finra observed unsuitable and largely unsupervised representative-driven recommendations to retail customers to exchange one annuity product for another.
The organization said it has observed instances where firms’ reasonable diligence was not sufficient in scope or depth to be considered a “reasonable investigation of the issuer and the securities.” In other instances, firms did not consider the related conflicts of interest in their evaluation and assessment of the reports’ conclusions and recommendations.
The report was issued as a resource that firms can use to strengthen their compliance programs and supervisory controls. It can be used by firms to improve their practices and processes based on the experiences of other firms, as well as better anticipate and address potential areas of concern in advance of their own examinations, Finra said.
The report can be found here.