Suitability for retail customers, fixed income mark-up disclosure, reasonable diligence for private placements and abuse of authority are the top concern flagged in the 2018 Report on FINRA Examination Findings published Friday.
The report from the U.S. Financial Industry Regulatory Authority (FINRA) details the results of its latest round of compliance exams. The report doesn’t include any quantitative data on the exams’ findings, but it does highlight the regulator’s observations of key compliance concerns based on their potential significance, frequency and impact on investors.
Specifically, the exams uncovered situations where reps “did not adequately consider the customer’s financial situation and needs, investment experience, risk tolerance, time horizon, investment objectives, liquidity needs and other investment profile factors when making recommendations; in others, they failed to take into account the cumulative fees, sales charges or commissions,” FINRA says in the report.
Additionally, FINRA found unsuitable recommendations that involved complex products, and over-concentration in illiquid securities and risky investment strategies; among other things. In addition, the industry self-regulatory organization “remains concerned about recommendations of unsuitable mutual fund share classes,” the report says.
The report highlights inadequate due diligence on products as a “common contributor” to the suitability failings found in the exams..
Alongside suitability, the exams found issues with disclosing fixed income mark-ups; due diligence for private placements; and industry reps abusing their authority in situations where they have discretionary trading authority, and where they act as trustees, executors, or hold powers of attorney for clients.
The report also underscores good practices that FINRA observed at some firms to prevent and address possible compliance problems.
“One of our core priorities is to provide firms with information that will help them more easily comply with rules and regulations, and this report aims to do just that,” says Robert Cook, CEO of FINRA, in a statement. “We hope the observations within the exam findings report enable firms to strengthen their own control environments and address potential deficiencies before their next exam.”