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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.