The Financial Industry National Regulatory Authority’s (”FINRA’s”) annual examination letter is out and filled with nuggets. Fear not; the breakdown that that you need is contained below.
New this year is FINRA’s off-site electronic review. This is for firms that are not scheduled for cycle exams in 2017.
- High Risk and Recidivist Brokers –
- FINRA has created a “bad boy” dedicated unit to look into these registered reps;
- FINRA will examine supervisory procedures, including verification of national search for reasonably available public records to verify Form U-4 information;
- FINRA will use criteria to detect and prevent future misconduct by so-called “bad boys;” and
- FINRA will look for concentration and is concerned with branch and non-branch locations and red flags like change of address or investment objectives by customers of “bad boys.”
- Senior Investors – FINRA will review controls to protect seniors from improper advice and fraud. It is also concerned with speculation, concerned with senior exploitation by non-licensed personnel and complex products bought in the search for yield.
- Social Media – FINRA will check for compliance with supervisory and record retention for social media and electronic communication ensuring that broker-dealers capture in the “written once, opened many” or WORM format.
- Cybersecurity – According to FINRA, adequate cyber security provisions depend upon business model, size and risk profile of the member firm. FINRA will look for lack of proper encryption of data, improper use of portable devices, improper storage of passwords, lack of physical security and deficiency of virus protection and software patches.
- Suitability and Concentration – Do registered representatives understand the products’ features that they have sold? Is there a concentration in specific investments or sectors in customer accounts?