The Securities and Exchange Commission has approved a Financial Industry Regulatory Authority proposal mandating that broker-dealers conduct more rigorous background checks on new hires. Per the new rule, brokerage firms must implement written procedures for confirming the completeness and accuracy of a broker’s registration data on a Form U4.
Firms will have to search “reasonably available public records” of both new hires and new registrants within 30 days of a U4’s submission to FINRA.
In other FINRA news, the self-regulatory organization has just released its exam and regulatory priorities for 2015. The regulator stated that the majority of compliance problems could be worked out if only broker-dealers always acted in their clients’ best interests. The statement was a significant one, considering that brokers are currently just obligated to make sure that they investments they recommend are suitable for clients.
Among the recurring challenges noted by the SRO:
• Failure to place customers’ interests first, including giving poor advice and recommending inappropriate investments.
• Firm cultures that put short-term profits or rapid growth over establishing the proper controls and creating an environment where high ethical standards are expected. FINRA recommends intolerance for both poor practices that may cause harm, as well as bad actors.
• A lack of strong supervision and inadequate risk management at certain firms
• Product complexity, opaque markets, poor sales training
• Conflicts of interest
FINRA’s Focus Areas in 2015 will include:
Sales practices, including requiring registered representatives and firms to conduct due diligence, make good suitability decisions, and explain products risks so that retail investors can understand them. FINRA is pressing firms to properly train registered representatives about product features, valuation, pricing, and suitability. It is also reminding them to stay abreast of changing market circumstances.
Interest-Rate Sensitive Fixed Income Securities: The SRO remains worried about how unusually low interest rates could possibly harm investors with products that may be easily impacted by said rates.
Variable Annuities: FINRA will evaluate compensation structures to see if there are any improper incentives for generating the sales of these instruments. The regulator is taking a focused interest in L share annuities, which come with higher costs and shorter surrender periods.
Alternative mutual funds: The SRO is worried that both customers and registered representatives do not fully understand how the funds will react to various market conditions.
Non-traded REITS: FINRA continues to be concerned about illiquidity, valuation difficulties, and high fees.
FINRA also will work with examiners and firms to make sure that its new supervision rules are implemented properly. FINRA Rules 3170, 3150, 3120, and 3110 went into effect at the start of December.
You can click here to see what else FINRA and its examiners are focusing on in 2015.
SEC approves Finra background check rule, InvestmentNews, January 5, 2015
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Beneficiaries of Puerto Rico Trust File Securities Fraud Lawsuit Seeking Over $4.5M From UBS Financial Services, Stockbroker Fraud Blog, January 5, 2015
Morgan Stanley Fires Wealth Management Group Employee For Stealing Client Data, Institutional Investor Securities Blog, January 5, 2015
NASAA Wants Life Partners Held Accountable for Texas Securities Act Violations, Stockbroker Fraud Blog, December 28, 2014