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FINRA’s Annual Regulatory and Examination Priorities Letter Highlights High-Risk Brokers

Every year, FINRA publishes its Annual Regulatory and Examination Priorities Letter to help its members understand where FINRA intends to focus its reviews during the coming year. The letter is a must-read for FINRA members, compliance personal, supervisors, and those who provide advice about regulatory exams and related litigation.

Among the issues discussed in the 2017 letter is an ominous warning to what FINRA calls “high-risk and recidivist brokers” and the FINRA member firms that employ them. FINRA warns that it intends to “devote particular attention” to such brokers and the firms that hire them. FINRA will be establishing a special examination unit dedicated to identifying and examining brokers whose prior problems cause FINRA to believe they pose high risk to investors. Fortunately, this warning comes with a list of three areas where FINRA will focus its attention, so firms can be prepared for an exam if they employ problematic brokers.

First, FINRA’s new examination unit intends to focus on high-risk brokers’ interactions with their customers.
Specific areas of focus will include (1) fees and commissions, (2) private transactions involving securities, (3) outside business activities, (4) know-your-customer issues, and perhaps most importantly, (5) suitability.

Second, FINRA intends to review the procedures firms use to vet problem brokers before hiring. This review will include an evaluation of whether the hiring firm conducted what FINRA calls a “national search of reasonably available public records to verify the accuracy” of the information provided by the broker in his or her U-4 application.

We take from this description that FINRA will not accept as a defense the firm’s reliance on the U-4 representations itself. Member firms should consider whether hiring a private investigation firm will be necessary before hiring brokers with checkered compliance histories.

Third, FINRA intends to evaluate and audit firms branch office supervisory systems of problem brokers to test whether those systems are designed to detect and prevent nefarious conduct. FINRA intends to make sure firms are properly monitoring for the potential use of unapproved email addresses for business, improper use of social media and websites, and other forms of unapproved and unauthorized communications.

A review of this section of FINRA’s Regulatory Priorities letter could easily lead member firms to conclude that it is not worth the supervisory risk and headache to hire and supervise brokers with problematic regulatory histories. We think that is precisely the chilling effect on hiring FINRA intends.

Gordon C. Young
by Gordon C. Young
Updated: October 28, 2020

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