Common FINRA Exam Deficiencies for Small Firms

As many of you may recall, in this year’s FINRA Regulatory and Examination Priorities Letter, Robert Cook mentioned that he would begin publishing many of the common examination findings they uncover during routine examinations in an effort to help firms identify areas of focus.  While no formal report has yet been released, for those paying attention, many of these topics have already been discussed during industry-sponsored conferences/events.  In fact, at the FINRA annual conference this year, there were several sessions focused solely on common examination findings for small, medium and large firms. As a result, this article outlines some of the most common deficiencies noted during FINRA cycle examinations of small firms, and issues that result in a cautionary letter.

Written Supervisory Procedures (WSP)

A major deficiency specific to many small firms is the lack of follow through on their WSPs. This includes outdated information or information that does not reflect actual processes being utilized during day-to-day operations. Additional faults include WSP that do not cover new or revised rules and/or interpretations of those rules and fail to address aspects of the firm’s business.

Supervisory Controls

Firms need to continuously be testing their supervisory controls to ensure they are functioning correctly. Inability to evidence what was tested and how sampling occurred is a clear red flag for FINRA. Auditors have also found that reports and CEO Certifications are not being completed in a timely manner, or in some cases, at all.

FINRA TIP: It’s okay to use policy templates from vendors. Embrace the fact that you’re small but don’t be afraid to strike sections that don’t apply to your business model.

Other supervisory breaches include:

  • 4530 Reporting (failure to report quarterly statistical and summary information)
  • Correspondence Review and Retention (cherry picking which emails are archived and which are not or using personal email addresses or IM system to avoid the archive)
  • Exception Reports (not available or not adequately tailored to identify red flags)
  • Branch Supervisory Deficiencies (failure to supervise customer complaints/securities/checks received)
  • Branch Inspections (insufficient checklists, templates and reports and failure to take corrective action once deficiencies are uncovered)

Customers – Suitability and Account Activity

Brokers that lack an understanding of both the products they sell and the customer they represent have resulted in major violations for firms. Specifically, the most commonly identified account suitability deficiencies for small firms include: not adequately monitoring and detecting excessive trading; outdated or missing customer profile information; failure to comply with prospectus and state guidelines; failure to effectively monitor recommendations for particular share classes; and mutual fund fees not appropriately being discounted.

FINRA TIP: Any address change should trigger an account review and customer contact. Moving often means a life change, which means a change in finances.

Advertising, Social Media, Public Appearances, Seminars

FINRA has also found that many firms fail to establish procedures to effectively supervise registered representatives using various methods to advertise.

  • Social Media: WSPs fail to address the use of social media platforms by personnel or inadequate supervisory review processes.
  • Website: Websites fail to clearly distinguish between the firm and its parent or other affiliates. Also, firms have failed to supervise branch websites.
  • TV/Radio: Failure to evidence post appearance review for TV and radio appearances.
  • Seminars: Failure to evidence approval of speaking notes and materials. Also, WSPs fail to address the review and pre-approval of seminar materials.

Activity Away From the Firm

Failure to identify and disclose outside business activities, and potential conflicts of interest, remains a top FINRA concern. Upon receipt of a proposed OBA, firms need to focus resources on conducting a thorough review under FINRA Rule 3270.01. Many compliance officers are additionally getting hung up on not fully understanding the key differences between OBAs and PSTs.

FINRA TIP: Continuously solicit and track annual attestations, following initial employment. The ongoing review of your representatives’ OBA is just as important as the original disclosure.

Hiring and New Business Lines

In terms of hiring, maintaining appropriate documentation is vital to compliance. Firms need to ensure that all employee agreements are kept on file and that they’re analyzing and maintaining adequate WSPs related to heightened supervision. Form U4 nondisclosures are another area that has caught FINRA’s attention as of late. There have been numerous citations in which the broker disclosed an item on their annual attestation, but no corresponding disclosure was made on the Form U4.

Being a small firm today is no easy feat, but luckily there are many compliance tools and resources available to help lighten the regulatory burden. This list, while not exhaustive, serves as a good guide for areas that firms should review and, where appropriate, revise their processes and procedures prior to their next exam. We also recommend that firms use these enforcement action fact patterns to strengthen their compliance programs and implement thorough employee training.

Course Catalogs

Schedule A Demo