FINRA Board Accused of Conflicts of Interest

As reported in InvestmentNews, the Public Investors Arbitration Bar Association (PIABA) issued a report asserting that certain “public governors” on the Financial Industry Regulatory Authority’s (FINRA) 24-person board serve on too many corporate boards and/or have connections to Wall Street such that they cannot represent the publicly effectively and face conflicts of interest.

FINRA is a self-regulatory organization which oversees thousands of broker-dealers on behalf of the Securities and Exchange Commission (SEC). It has 13 public governors, 10 industry governors and one seat for its CEO. The PIABA report notes that, under FINRA’s by-laws, its public governors shall not have any material business relationship with a broker or dealer or other self-regulatory organization.

PIABA states that, instead of bringing a customer-oriented view to the table, FINRA’s public governors “often provide additional representation for security industry constituencies.” PIABA also critiques the selection of public governors with ties to the security industry. It states, “In many instances FINRA’s public governors join the board after long careers in the securities industry. . . . Although some academics and former regulators do serve on FINRA’s board as public governors, the board only infrequently includes persons primarily identified as investor protection advocates. This absence is troubling for an organization that publicly characterizes itself as dedicated to investor protection.”

InvestmentNews also reports that a FINRA spokesperson defended the FINRA board and its public governors, noting that “Each governor, regardless of his or her affiliation or classification, is responsible for serving in an unbiased and objective manner, and voting on matters for the good of the investors, industry and marketplace.”

FINRA Proposes Update to Temper Expungement and Elder Abuse

FINRA’s Board of Governors recently voted to move ahead with two key initiatives for broker-dealers. One initiative would amend codes of arbitration to make it tougher for brokers to erase black marks from their public record. The proposal, which will be submitted to the SEC for approval, would incorporate existing guidance and best practices into the rules. The guidance reminds arbitrators that expungement is “an extraordinary remedy that should be recommended only under appropriate circumstances” and that “customer dispute information should be expunged only when it has no meaningful investor protection or regulatory value.” Ultimately, FINRA is trying to strike the right balance between transparency and eliminating information in a report about a broker that is either unfair or false.

The other initiative is meant to enhance protection for senior investors. The rule would require firms to obtain the name and contact information of a trusted person for the customer's account and allow firms to freeze funds in accounts of investors 65 and older when there is “reasonable belief” of financial exploitation. The proposal does not indicate precisely what constitutes a “reasonable belief” of exploitation.

SEC Issues Risk Alert Regarding Suitability of Structured Products in Retailed Sales

The SEC’s Office of Compliance Inspections and Examinations (“OCIE”) recently issued a “Risk Alert” highlighting deficiencies in broker-dealer supervision and compliance controls over retail Structured Securities Products (“SSP”) sales. SSPs are securities, often issued as corporate obligations of an affiliate of an underwriting broker-dealer. They derive their value from, and provide exposure to, a variety of underlying asset classes such as a single security, baskets of securities, indices, options, commodities, and/or foreign currencies. SSPs, which may or may not be listed on an exchange, typically have some form of embedded derivatives and may supply, among other things, principal protection, interest payments, or leveraged exposure to the referenced assets.

The Alert references deficiencies in the areas of suitability and supervision. In particular, OCIE found that all of the various examined firms failed to maintain or enforce adequate controls relating to determining the suitability of SSP recommendations and failed to conduct compliance and supervisory reviews of determinations by registered representatives of customer suitability in the SSPs, as required by internal controls.

Ultimately, the Alert offers some pointers for compliance by broker-dealers. It notes that broker-dealers should use the Alert as a chance to double-check supervisory and compliance procedures for general suitability criteria and especially for complex or structured products sold to retail customers. It also suggests that broker-dealers perform random internal audits to ensure compliance with its own rules.

CFPB and SEC Jointly Issue a Consumer Advisory and Investor Bulletin on Diminished Capacity

The Consumer Financial Protection Bureau’s Office for Older Americans and the Securities and Exchange Commission’s Office of Investor Education recently issued a bulletin to help investors and consumers understand the potential impact of diminished capacity on their ability to make financial decisions and to encourage investors and consumers to plan for possible diminished financial capacity well before it happens.

The advisory bulletin makes the following recommendations to help avoid or minimize problems: (1) organize your important documents (this includes bank and brokerage statements and account information, mortgage and credit information, insurance policies, pension and other retirement benefit summaries, Social Security payment information and contact information for financial and medical professionals); (2) provide your financial professionals with trusted emergency contacts; (3) consider creating a durable financial power of attorney; (4) think about involving a trusted relative, friend, or professional; (5) keep things up to date; and (6) speak up if something goes wrong (i.e. if you ever think someone is taking advantage of you, or that you’ve been the victim of a fraud)

With regard to helping others who may have diminished capacity, the CFPB and SEC make the following recommendations: (1) have an open conversation about investments and other financial matters sooner rather than later; (2) help your relative or friend with managing finances; (3) if your family member or friend has named you to manage money or property, understand your responsibilities and how you can protect your loved one from financial exploitation. 

Finally, if you are someone who has been asked by a loved one or friend to help out with his or her finances, the CFBP and SEC notes you can do the following to help: (1) help with ongoing financial responsibilities (you may need to take on immediate tasks, such as helping to pay bills, arranging for benefit claims, preparing tax returns, or helping with investment decisions); (2) review their investment portfolio; (3) assess the riskiness of their investment portfolio; (4) contact their investment professional.