FINRA Examination Findings: firms need to tighten up supervisory systems.
Last Friday, the Financial Industry Regulatory Authority announced examination findings that many brokerage firms have been recommending unsuitable investments without considering the impact that cumulative fees, sales charges and commissions might have on its customers.
In the FINRA Examination Findings, the regulator found that many firms and its representatives were not considering the customer’s financial needs and were overconcentrating portfolios in illiquid securities, such as non-traded REITs, structured notes and sector-specific investment strategies.
According to the report, FINRA observed a failure of oversight in firms and adequate supervisory system to identify and prevent potentially excessive trading and account activity by representatives.
The regulator suggested setting a higher threshold for activity reporting that includes meaningful customer information, such as the number of trades, commissions, cost- or commission-to-equity ratios, margin balances and account losses.
FINRA also reportedly expressed concerns about unsuitable variable annuity recommendations. The regulator found unsuitable and largely unsupervised recommendations to retail customers, which resulted in the exchange of one annuity product for another, often called annuity switching.
Some representatives reportedly concealed the source of funds used to purchase new variable annuities that may have resulted in unfavorable tax consequences. Customers may have consequently paid higher fees or experienced the loss of material, paid-for-accrued benefits.
FINRA’s findings reportedly warn firms to take more care in providing adequate supervisory systems, suitable recommendations, and adequate due diligence to protect investors and prevent disciplinary action.
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Tags: failure to supervise, FINRA findings, FINRA regulations, illiquid investments, non-traded REITs, unsuitable investments, variable annuity switching Last modified: December 14, 2018