Our Voices

FINRA Releases its Annual Report on Examination Findings for 2018

December 21, 2018

 

The Financial Industry Regulatory Authority’s (“FINRA”) issued its Report on FINRA Examination Findings for 2018 (the “Report”) on December 7, 2018.  In the Report, FINRA notes that its examination, surveillance and risk monitoring programs of registered broker-dealers are critical in the furtherance of FINRA’s mission of investor protection and ensuring the integrity of financial markets.  While not a complete discussion of FINRA’s findings from all of its member firm examinations, the Report focuses on selected observations from recent examinations that FINRA considers worth highlighting because of their significance, frequency and impact on investors and the markets.  The Report is intended to be used by FINRA member firms as another resource to strengthen their compliance programs, policies and supervisory controls and describes practices that FINRA has observed to be effective in certain circumstances. 

 

In the Report, FINRA highlights the following areas where member firms experienced challenges:

 

  • Suitability for Retail Customers, including unsuitable recommendations by associated person to retail investors (including recommendations concerning variable annuities), overconcentration in certain categories of securities, and excessive trading in customer accounts;

 

  • Fixed Income Mark-up Disclosure, including failure to enter information into the firm’s order entry system, improper adjustments to prevailing market price, inadequate disclosure for trades conducted on an agency basis, failure to provide disclosure for structured notes, incorrect designation of accounts as “institutional,” improper security-specific hyperlinks and descriptions, and failure of vendors to identify the correct prevailing market price;

 

  • Reasonable Diligence for Private Placements, including failure to perform reasonable diligence on private placement offerings, failure to investigate red flags identified during the diligence process, overreliance on third parties, and failure to consider potential conflicts of interest arising from third-party due diligence; and

 

  • Abuse of Authority in connection with discretionary accounts, including exercising discretion in customer accounts without authorization, exercising discretion after the authorization had expired, mismarking order tickets, making false statements or relying on blank forms, and abusing trustee status.   

 

The Report also includes FINRA’s additional observations concerning the following additional areas where member firms experienced challenges:

 

  • Compliance with Anti-Money Laundering obligations pursuant to FINRA Rule 3310 (Anti-Money Laundering Compliance Program), including issues related to the questionable ownership status of foreign legal entity accounts, the lack of documentation of investigations of potentially suspicious activity and irregular and undocumented searches under Section 314(a) of the USA PATRIOT Act;

 

  • Accuracy of Net Capital Computations required under Securities Exchange Act of 1934 (the “Exchange Act”) Rule 15c3-1 (Net Capital Rule), including insufficient methodologies and documentation regarding expense-sharing agreements, incorrect inventory haircuts and inaccurate operational charges;

 

  • Liquidity, including extended stress test periods and failure to incorporate stress test results into their business models;

 

  • Segregation of Client Assets required pursuant to Exchange Act Rule 15c3-3, including inconsistent check-forwarding processes, challenges with possession and control and inaccurate reserve formula calculations;

 

  • Operations Professional Registration, including unregistered individuals approving general ledger journal entries and business requirements, and unregistered supervisors;

 

  • Customer Confirmations pursuant to FINRA Rule 2232 (Customer Confirmations), including inaccurate disclosure of trading capacity, mislabeled disclosure of compensation, incorrect disclosure of average price, no disclosure of market maker status, and inadequate supervision;

 

  • Use of Fictitious Business Names (or “DBAs”) and Communications with the Public, including failure to disclose FINRA member firm names and to include hyperlinks to FINRA's BrokerCheck® on websites, and inadequate written supervisory procedures (“WSPs”) or controls;

 

  • Best Execution under FINRA Rule 5310 (Best Execution and Interpositioning), including no execution quality assessment of competing markets, no review of certain order types, and no evaluation of required factors when reviewing best execution;

 

  • TRACE Reporting under the FINRA Rule 6700 Series (Trade Reporting and Compliance Engine (TRACE)), including overreliance on the FINRA list of TRACE-eligible securities, late and inaccurate reporting, inaccurate indicators and identifiers and insufficient WSPs; and

 

  • Market Access Controls required under Exchange Act Rule 15c3-5, including inadequate pre-trade financial controls and overreliance on third-party vendors.

FINRA’s complete 2018 Report on Examination Findings can be accessed on the FINRA website at:

http://www.finra.org/sites/default/files/2018_exam_findings.pdf

For more information, please contact:

 

Joe Tagliaferro III                    jat@ckrlaw.com

Anthony Caldwell                    acaldwell@ckrlaw.com

Barrett S. DiPaolo                     bdipaolo@ckrlaw.com