RCI overlay of FINRA 2019 Exam Findings


Wednesday, January 15, 2020 | By Martin Orbach, Vice President, Regulatory & Analytics Solutions – SS&C Risk & Compliance Intelligence (RCI)

RCI overlay of FINRA 2019 Exam Findings

FINRA recently released its annual 2019 Report on FINRA Examination Findings and Observations. This excellent summary of what FINRA has found from its examinations and observed practices highlights real-world areas of concern. It’s also a comprehensive (although not complete) inventory of issues that can be referred to by compliance professionals as a gauge or reference at any FINRA-regulated broker-dealer or investment advisor. In this blog post, I’ll break it down into a quick read, highlighting consistent themes as well as pointing out the most important and relatable findings that will apply to a firm of any size.

Noteworthy Examination Findings on Page 2: Addressing and incorporating newly adopted or amended rules into a firm’s existing compliance and surveillance procedures. In this example, FINRA specifically calls attention to the new trusted contact person requirement as part of Rule 4512 (Customer Account Information) and the temporary holds on fund disbursements covered under Rule 2165 (Financial Exploitation of Specified Adults). These protocols need to be incorporated into a firm’s compliance manual, and these updates should be easily demonstrated to FINRA during an examination or audit.

Insufficient Supervision for Specific Types of Accounts on Page 3: Supervision of restricted and insider accounts. FINRA observed that some firms don’t have the ability to monitor trading in restricted or grey list securities. Further, I noted that this extended to the inability of some firms to identify and restrict account activity susceptible to insider trading because of the incorrect assumption that its clearing firm conducted the surveillance. I would also add that having the awareness of which accounts are owned by insiders and monitoring the trading of those accounts, as well as positions held, is part of this requirement. In my opinion, this also extends to the monitoring of the trading of its employees in accounts held away from the firm. Surveillance of employee trading in the securities held by a known insider is not only a regulatory requirement but also is part of a firm’s Code of Ethics.

Investment Suitability on page 4: In the most commonly noted finding and observation, FINRA pointed out that some firms didn’t have adequate systems of supervision to review whether recommendations were unsuitable according to a customer’s individual financial situation and needs, investment experience, risk tolerance, time horizon, investment objectives and liquidity needs. As we approach the SEC RegBI compliance date of June 30th, 2020, investment suitability compliance and having procedures and protocols incorporated into a firm’s supervisory procedures is a must-have. FINRA called attention to specific Suitability issues such as:

Inadequate supervision of product exchanges – FINRA found that many firms neglected to evaluate the suitability of recommendations when customers exchange certain products such as mutual funds, variable annuities or unit investment trusts (UITs).

Ability to spot suitability “Red Flags” – The report shows that some firms lacked the systems and processes for the identification of accounts that have drifted or deviated from the investors’ tolerance for risk as well as identifying the transactions that caused the accounts to go off-side. This extends to the incorporation of time-horizon as well as liquidity needs into suitability assessments.

Supervision of changes to an investors account information – FINRA pointed out instances where registered representatives changed account information (such as risk tolerance or liquidity and time-horizon information) so as to make investments that, as FINRA noted, would have been unsuitable if not for the account change; the investments would have been subject to heightened supervisory scrutiny and would have raised suitability concerns and likely would have not been approved. Compliance officers must have the technology to pin-point accounts where recent changes in risk tolerance and customer details were made in managed accounts that were then followed by trading activity.

Excessive trading or churning – This is considered to be a “gate-way issue” and almost always is an indicator of additional issues with an account. Churning or excessive trading impacts not only performance but also litigation. Cases of churning are always the most frequently arbitrated and are indicative of a lack of supervision at the branch or OSJ level. Excessive trading can easily be identified by deploying surveillance technologies that identify patterns of behavior that not only hurt investors but damage a firm’s reputation.

Anti-Money Laundering Examination Findings on page 8 – Not surprisingly, inadequate transaction monitoring deficiencies are highlighted. While most firms have some form of sanction list or watch list capability, AML transaction monitoring continues to be a challenge. RegTech must support user customizations and configurations as well as customizable typologies to identify:

  • suspicious in-bound and out-bound wires
  • asset movements by account holders domiciled in, doing business in or regularly transacting with counterparties in jurisdictions known as bank secrecy havens, tax shelters or high-risk geographic locations
  • an investor account where physical or share deposits occur, followed by an immediate liquidation and journaling of proceeds
  • investors with positions or engaging in trading of thinly traded securities

I encourage everyone to download the report from FINRA.

To learn how SS&C’s Risk & Compliance Intelligence Platform can help you address the concerns raised in the FINRA report, download our whitepaper.



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