Executive Summary: In May, SIFMA's Compliance & Legal Society hosted their 2010 annual meeting in National Harbor, Maryland. Regulators from FINRA, the SEC, Federal Reserve, Treasury Department, FinCEN, and state securities commissions attended, along with various industry experts and compliance and legal professionals. There were several panels over the two-day seminar discussing the current regulatory environment and regulatory expectations for broker-dealers. FINRA was represented by several senior members, including Richard Ketchum, Chairman and CEO; James Shorris, Executive Director of Enforcement; and Michael Rufina, SVP of Member Regulation.
Comments from FINRA:
CEO Rick Ketchum highlighted some current FINRA issues and priorities. Some of the highlights include:
- The stability and integrity of the equity markets remains an important priority to FINRA. The market needs "shock absorbers" to handle major fluctuations and liquidity must be maintained.
- FINRA supports the fiduciary standard used by investment advisors.
- An initiative is pending that would require mutual fund investors to be provided a point of sale (POS) disclosure.
- The importance of vetting new products. Registered reps should be properly trained and clients must be made aware of all potential risks.
- Principal Protected Notes should be properly marketed to address risks. Selling them as "safe" could raise concerns as there are risks involved.
- There will be more scrutiny around Private Placements and Reg D offerings; firms participating in these offerings should become familiar with Notice 10-22.
Jim Shorris, Executive Director of Enforcement at FINRA, also mentioned Principal Protected Notes and referred to Regulatory Notice 09-73. Other products and sales practice concerns revolved around reverse convertibles, put options, equity indexed and variable annuities, and 1035 exchanges. Similar to Principal Protected Notes, the primary concern mentioned is providing investors with proper disclosures so they understand the risks.
Michael Rufino, Senior Vice President of Member Regulation, spoke about changes made to FINRAs 2010 examination program. Member firms are now on a one-, two-, three-, or four-year inspection cycle. Cycles for some of the firms have changed, Mr. Rufino mentioned there is no specific reason behind this in most cases. Examiners now have some decision-making authority around areas to be included in their testing. The following six areas were identified as being at the examiner's discretion as to the detail of the testing: books and records; anti-money laundering; complaints; suitability; licensing and registration; and supervisory controls. In addition to making the exam scope more flexible, FINRA has specialists in the areas of mergers and acquisitions, information technology, and products that will assist in the examinations when necessary. Specific areas mentioned as priorities for this year include the handling of cash equivalents, sales to seniors (unsuitable mutual funds/annuities), registered reps participating in social networks, and charging customers for postage/handling. (Concerns around customer costs exceeding the 5% transaction cost guidance or excessive "handling" costs.)
More Information:
Ensuring that your firm's policies, procedures, and controls are in line with FINRA expectations is important in order to minimize your firm's regulatory risk and to avoid potentially costly fines. Regulatory Compliance is dedicated to partnering with our clients and providing the most up-to-date information on the current regulatory environment. For questions about your firm's obligations under the various FINRA rules, please contact your Regulatory Compliance account manager at 603-434-3594.
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