Each year, FINRA and the SEC publish their priority letters explaining areas of focus for the upcoming year. The priorities reflect practices and/or products that are perceived to present either heightened risk to investors, a risk to the integrity of the U.S. capital markets, or are otherwise areas of potential concern inherent in the securities industry.
One area that FINRA will be focusing on is incentive structures and conflicts of interest that may arise with registered representatives selling proprietary or affiliated products, or products for which the firm receives third-party payments. Related to this are suitability and concentration concerns. Firms have an obligation to make sure that any recommended products are suitable for the customer. A conflict of interest may arise where a product that is unsuitable is recommended solely because the firm will receive a higher commission on the sale. Concentration also plays a role in the analysis. FINRA explains that a firms approach to monitoring concentration should be dynamic taking into account market changes, financial conditions of the issuer and any other factors that increase concerns about suitability or concentration. FINRA’s focus will therefore be on firms’ policies and processes that govern these topics.
Another conflict that has caused concern is a registered representatives’ outside business activities. FINRA will be reviewing firms’ procedures to review any outside business activities to avoid any potential conflicts of interest.
One of the areas that the SEC will be focusing its efforts on relates to what it summarizes as matters of importance for retail investors. Specifically, protecting retail investors and retirement savers. With the evolving number of investment options available, as well as the complexity of such options, the SEC is planning on conducting examinations to assess risks to investors that could arise. For example, exchange-traded-funds have become a highly sought after investment option. The SEC will be focusing on ETF sales strategies, trading practices, concentration, trading risks, and suitability.
Similarly, the SEC will be reviewing branch offices and the supervision of registered representatives to make sure that proper analytics are in place to identify potentially inappropriate trading activity. The review will also focus on recidivist representatives (i.e. identifying individuals with less than acceptable track records). Firms need to make sure that they have appropriate compliance oversight and controls in place to detect individuals that have been previously disciplined or barred.
This is in no way an exhaustive list of the areas of focus. We recommend that anyone reviewing this blog review FINRA’s and the SEC’s priority lists in their entirety in order to understand all the areas of potential examination.