FINRA Publishes 2018 Report on Examination Findings

On December 7, 2018, FINRA published its 2018 Report on FINRA Examination Findings which details observations from recent exams of FINRA member brokerage firms that it considers worth highlighting due to their potential significance, frequency, and impact on investors and the markets.  In particular, the report discusses suitability for customers and reasonable diligence for private placements.

As to suitability for retail customers, FINRA continued to observe situations where financial advisors did not properly consider the customer’s financial situation and needs, investment experience, risk tolerance, time horizon, investment objectives, liquidity needs and other investment profile factors when making recommendations as required under FINRA Rule 2111.  Inadequate product due diligence, including failure to fully understand the specific features and terms of products recommended to customers was also commonly observed by FINRA in its exams.  Moreover, the exam findings noted instances of overconcentration of customer accounts in complex structured notes or sector-specific investments, as well as illiquid securities, such as non-traded real estate investment trusts; excessive trading; and unsuitable variable annuity recommendations, particularly where brokers were recommending that a client exchange one annuity product for another.

As to reasonable diligence for private placements, FINRA observed instances where firms failed to uphold their suitability obligations and conduct a reasonable investigation before recommending such products by evaluating the issuer and its management; the business prospects of the issuer; the assets held by or to be acquired by the issuer; the claims being made; and the intended use of proceeds of the offering.

Gregory B. Simon Law, LLC is a national securities law firm that provides legal services to investors and financial advisors on a wide range of financial industry matters.  For more information on the firm, please visit https://www.gregsimonlaw.com.

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