Broker-Dealer firms have been reviewing their supervisory and operational procedures, training programs and annual compliance reviews, in light of the financial markets’ recent myriad difficulties. Such reviews are advisable to ensure that issues such as the following are addressed:
Suitability. Appropriate recommendations and adequate suitability review present special challenges in an environment of heightened investor concern, regulatory scrutiny and rapid market changes. Rather than considering a recommendation in isolation, firms should try to evaluate whether the recommendation is consistent with an overall asset allocation that is appropriate for the investor.
Switching. Firms should head off any possible tendency of registered representatives to make unsupportable recommendations to liquidate securities of financially viable issuers merely because an affiliate of the issuer has solvency problems, particularly when a recommended substitute investment benefits the firm or the representative.
Disclosure. Many issuers are revising prospectuses and collateral material to reflect altered market conditions and investment strategies. Firms and their representatives should be aware of these changes and provide accurate, updated disclosure to customers. Firms should also remember that FINRA requires specific disclosures regarding the federal money market fund guarantee program. (See FINRA Notice to Members 08-58.)
Regulatory reporting. The potential increase in customer complaints and regulatory inquiries, as well as adjustments in a firm’s financial situation, may require more frequent updated filings on Form U4, Form BD, FOCUS reports, and/or event and quarterly filings under FINRA Rule 3070
Customer communications. Registered representatives will frequently want to communicate with their customers about the current market conditions. Firms should ensure that these communications comply with content, approval, filing and retention requirements, particularly with respect to email.
SIPC disclosure. Concerned customers may inquire about protections against a broker-dealer’s insolvency. Registered representatives should be able to provide complete information about the Securities Investor Protection Corporation. (See www.sipc.org.)
Data security and privacy. Clients may change brokerdealers and/or retain independent consultants to evaluate their financial situations. Firms should have adequate data security and privacy programs, and pay particular attention to the new FTC “red flag” requirements and proposed amendments to Regulation S-P.