FINRA’s Exam Guidance Is A Big Yawn

From Ulmer’s Broker-Dealer Law Corner Blog
By Alan M. Wolper

As promised, FINRA has released its first Report outlining common findings from its examinations, in an effort to help member firms comply with the rules and, presumably, avoid problems that other firms encountered. A noble idea, especially for an entity not exactly known (at least lately) for its proactive measures to assist BDs with their ongoing compliance struggles. Alas, it’s not clear that much was accomplished. I was hoping to read something new and noteworthy, but, by and large, we got the same old same old, i.e., the same stuff we see in the annual Exam Priorities letter. I suppose that this may not be FINRA’s fault, however. Indeed, it may simply be a function of the fact that no matter what FINRA does to announce the sorts of misbehavior it finds problematic, member firms and their associated persons just continue to repeat the same errors we have always seen.

Take, for example, the part of the Report that deals with OBAs and PSTs, identified as a continuing issue. Well, these have been an issue for firms for, gee, forever. The rules governing OBAs and PSTs are largely the same as they have been for decades (granted, with some slight modifications found in the Supplemental Material to Rule 3270, requiring an analysis of proposed OBAs to ensure there is no likelihood of confusion). Yet, not a month goes by without multiple OBA/PST cases being included in the list of finalized Enforcement cases. How many times do reps need to hear that they need to provide notice of OBAs to their firms? How many times do firms need to hear that the receipt of selling compensation renders a transaction a PST? How many times does FINRA need to remind members that their supervisory obligations include not just performing an analysis but memorializing it, as well?

There is a section on AML violations that is similarly full of old news. It starts off with the admonition that “[s]ome firms failed to establish and implement risk-based policies and procedures to detect and report suspicious transactions.” Granted, it goes into somewhat more detail, but not much, really, not enough to provide true guidance in avoiding problems when the examiners come to visit. So, what’s the point of the Report?

Truly, the best way to learn what really gripes FINRA is to review the Enforcement actions it files. Helpfully, FINRA makes available on-line all the complaints, the settlements, and the adjudicated decisions. There is no better view into FINRA’s collective mind – a scary place, indeed – than these documents. Every compliance issue noted in the Report just released has already been the subject of Enforcement actions, and discussed in much greater detail than in the Report. Every argument respondents have conjured up to defend themselves against charges of rule violations – including all the usual suspects, like “FINRA examined me three times before this and never said anything about this,” or “no customers complained so what’s the big deal,” or “I’m just a small firm and can’t afford to do all the things you say I should be doing” – are outlined in these cases and addressed (and, unfortunately, but typically, dismissed). You really want to learn about the problems that firms have encountered selling UITs? Read the cases FINRA has already brought, not the Report.

With all this said, I don’t want to be too much of a Debbie Downer. I encourage FINRA to be more transparent about its attitude towards enforcement of the rules, and to provide as much advance notice of the standards to which it will hold member firms as possible. Perhaps this Report is a start; at a minimum, even while not particularly useful, it represents an effort by Robert Cook to honor promises he’s made to members to fix what’s broken at FINRA – which is a long list, to be sure. As I have said before, his words, while interesting, are not nearly as telling as his actions, and, for the most part, I continue to wait to see action.