FINRA 2018 Report Exam Findings

On Dec. 7, FINRA issued second annual report on exam findings.

  • Second annual report on examination findings, resource for firms from FINRA360.
  • Follows 2017 report, highlighted cybersecurity, OBA, best execution.

2018 Report

  • Observation from recent exams, selected for significance, frequency, and impact.
  • Highlight exam findings on suitability for retail customers, fixed income mark-up
    disclosures, reasonable diligence for private placements, and abuse of authority.
  • Summary of additional observations, AML, confirmations, best execution, TRACE.
  • Case study of findings, Apr. 2018 sweep of volatility-linked products.

Suitability for Retail

  • Concentration in complex structured notes, sector-specific investments, or illiquid securities, such as non-traded REITs, that resulted in significant customer losses.
  • Some firms did not establish or enforce adequate supervisory system reasonably
    designed to identify or prevent potentially excessive trades in customer accounts.
  • Recommendations for variable annuity did not comply with suitability obligations.

Mark-Up Disclosures

  • Failure to enter information in firm order-entry system, inaccurate mark-up/down.
  • Did not give disclosure to customers, wrongly identified accounts as institutional.

Private Placement Diligence

  • No additional research done on new offerings, relied on diligence in prior offering.
  • Nor independently evaluated third party conclusions, respond to major concerns
    in reports, address concern regarding issuer or offering outside context of report.

Abuse of Authority

  • Exercised discretion in customer account, no prior authorization or firm approvals.
  • Mismarked order ticket, not comply with security threshold limitation, restrictions.
  • Some representatives convinced senior investors, to establish trusts, name them
    trustee or co-trustee to take control of the assets, and direct funds to themselves.