FINRA cautions brokers about moving clients from broker to advisory accounts

Written on Jan 10, 2018

FINRA warned brokers Jan. 8 to be careful when moving clients between brokerage and advisory accounts.

The guidance was included as part of FINRA’s annual regulatory and examination priorities letter. As is the ‘self-regulator’ case in most years, the 2018 roster resembled the prior year's list.

A perennial FINRA emphasis is on enforcing the suitability rule, which requires brokers to sell products that fit a customer's risk appetite, investment objectives and other characteristics.

In this year's priorities letter, however, FINRA added a paragraph that it didn't have in the 2017 priorities that seems to target dually registered brokers who can act as both brokers and investment advisers.

"FINRA will review situations in which registered representatives recommend a switch from a brokerage account where that switch clearly disadvantages the customer, such as where the registered representative recommended that the customer purchase a securities product subject to a front-end sales charge in a brokerage account and then shortly thereafter recommended that account be transferred to a fee-based account," the letter states.

A brokerage account must adhere to the suitability standard while a fee-based account is governed by fiduciary duty - the requirement investment advisers must meet to act in their clients' best interests.

New examination areas in the 2018 list include business continuity planning and initial coin offerings and cryptocurrencies.

The hype surrounding bitcoin has made it top of mind for all financial regulators.

As it did last year, FINRA this year emphasized cybersecurity and high-risk firms and brokers.

The regulator said that it will focus on hiring and supervisory practices of brokerages that employ brokers with checkered disciplinary histories.

The examination priorities list and the examinations findings report released last month are designed as a compliance guide for brokerages. FINRA examines annually about half of its approximately 3,700 broker-dealer members. FINRA also regulates about 634,000 registered representatives.

In a cover letter to the priorities list, FINRA CEO Robert Cook promised that the organization would make some changes this year in the examination process.

"[W]e expect to add or strengthen measures to increase information sharing with firms during examinations, improve processes for making examination information requests and enhance training of examiners," Mr. Cook wrote.

Leave a comment