A new FINRA report summarizing major takeaways from examinations of firms under its purview found that analyses often uncovered similar missteps, including substandard supervisory guidance for brokers about new and amended firm rules and regulations, inadequate supervision of the suitability of certain product exchanges, and a substandard amount and quality of supervision and inspection programs for branches.
The third-annual “Report on Examination Findings and Observations” was the first to make a differentiation between an examination’s “findings,” which referred to violations of rules or regulations, and “observations,” which detailed ways in which firms could improve substandard practices that have not yet risen to the level of a violation. FINRA Executive Vice President of Member Supervision Bari Havlik said the agency hoped the report would help advisors in “strengthening their own control environments and addressing potential deficiencies” before future exams.
“Our position as a self-regulatory organization affords us the unique opportunity to provide firms with resources that help them more easily comply with rules and regulations and protect investors—and this report aims to do just that,” Havlik said.
The report divvies its findings into four sections (sales practice and supervision, firm operations, market integrity and financial management), with each including additional subsections, including findings and observations on cybersecurity, suitability, digital communication and the segregation of client assets.
FINRA acknowledged that some firms inadequately supervised account statements and other forms, and lacked procedures to discern forged documentation, including “accommodation forgery,” which refers to when a registered representative or other individual might ask a client to sign a blank, partial or incomplete document. The report also found some firms lacked the proper supervision to identify unsuitable transactions.
“For example, some firms did not identify or question patterns of similar recommendations by representatives or branch offices across many customers with different risk profiles, time horizons or investment objectives,” the report read. “In some instances, several customers of a representative or branch office appeared to have made ‘unsolicited’ transactions in identical securities, which could raise questions around whether the transactions were actually ‘unsolicited.’”
Additional findings and observations are available in the full report, which can be found here.
