On October 16, 2019, FINRA published its 2019 Report on Examination Findings and Observations (“The Report”). The Report essentially details observations from recent examinations of broker-dealer firms. In the past, broker-dealer firms have used these reports to anticipate potential areas of concern and improve their procedures and controls accordingly.

The topics addressed in the 2019 Report range from Sales Practice and Supervision to Financial Management. For each topic, FINRA highlighted the applicable regulatory obligation, noteworthy examination findings and provided a list of additional resources to aid firms comply with their regulatory duties. For instance, as it relates to Supervision, FINRA highlighted the regulatory obligation under FINRA Rule 3110 requiring firms to establish, maintain and enforce a system to supervise their activities and the activities of their associated persons. As part of their examination findings, FINRA noted that certain firms did not adequately address newly adopted or amended rules by developing controls to address the new requirements applicable to their business and updating their written supervisory procedures (“WSPs”) accordingly.

Of noted importance to our clients, FINRA also discussed Suitability, pursuant to FINRA Rule 2111. FINRA found that certain firms did not have adequate systems of supervision to review that recommendations were suitable in light of a customer’s individual financial situation and needs, investment experience, risk tolerance, time horizon, investment objectives, liquidity needs and other investment profile factors. Specifically, FINRA addressed suitability as it pertains to recommendations that customers exchange mutual funds, variable annuities or unit investment trusts (“UITs”). This was an issue also addressed in the 2018 Report on FINRA Examination Findings and an area of increased supervision and enforcement by FINRA. 

We encourage our clients to read the 2019 Report on Examination Findings and Observations in detail. It serves as a useful resource in reviewing compliance and supervisory programs and making necessary improvements in both.