B/D Attorney: Don’t Be Distracted by FINRA Examination Priorities Letter

Alan Wolper, an attorney with significant experience helping advisers and brokers navigate FINRA and SEC examinations, says the recently published FINRA 2019 priorities list is interesting, but ultimately not all that informative when it comes to helping advisers avoid the most pressing compliance issues.

Apart from his work as co-chair of the financial services and securities litigation practice of Ulmer & Berne, Alan Wolper is the editor of BDLawCorner.com, a blog intended for broker/dealers which are members of FINRA—and the individuals associated with such firms, including legal and compliance professionals and registered representatives, as well as outside legal counsel and securities consultants who provide service to broker/dealers.

As part of his law practice and his blog, Wolper has been thinking a lot about the newly announced 2019 FINRA member examinations priorities letter. The letter suggests FINRA will increase its focus on emerging issues such as online distribution platforms and fixed-income markup disclosure obligations, as well as ongoing member risks such as fraud and cybersecurity. FINRA also says it will concentrate on firms’ compliance with the Financial Crimes Enforcement Network’s Customer Due Diligence rule and with disclosure obligations related to fixed-income transactions. Unlike previous priorities letters, this year’s edition does not explicitly repeat topics that have been mainstays of FINRA’s attention in the past.

“Nonetheless, firms should expect that FINRA will review for compliance regarding these [previously announced and] ongoing areas of focus,” the letter says.

According to Wolper, this last statement is probably the most important aspect of the whole priorities letter.

“In my practice, I see a pretty big disconnect between the things that FINRA management announces as the new priorities for the coming year versus what actually goes on at the boots-on-the-ground examination level,” Wolper says. “Whether you’re dealing with examiners from the central member regulation group or if you’re talking about regional counsel enforcement, this holds true, in my experience.”

Wolper says the FINRA management has good reason to put forward an image “that says the regulator is not looking to play gotcha.” Instead, FINRA has made it a priority to signal that its examiners appreciate the significant cost and effort it takes for firms to respond to FINRA requests and reviews. This helps to cultivate an important rapport and openness between the reviewers and the reviewed. 

“But if you do the work that I do and you are dealing with firms that go through routine examinations or even cause examinations—there has really not been any change to the approach in some time,” Wolper says. “I’m painting with a broad brush, of course, but for the most part, examiners in my experience are still playing the game the same way they have been for a really long time. Frankly, they go into an examination looking for something they can write you up about. In my opinion, this is a real challenge for advisers and brokers to deal with.”

FINRA auditors, for their part, are required under the organization’s procedures to operate with an open mind, with the understanding that the auditor will honestly follow any evidence trails to wherever they lead. They should never presume an outcome from the start. Indeed, FINRA’s reporting from recent years suggests an ongoing reduction in terms of fines collected and the number of enforcement cases that being filed.

Wolper admits he is pretty tough on FINRA, and he doesn’t like to bash the examiners just for trying to do a good job. He says their performance motivations are understandable and they are working to protect investors from wrongdoing and negligence.

“Unfortunately, it is hard for even expert examiners to be expert on all the different complex business models and transactions that happen in our industry,” Wolper says. “In general, I would say, the further your business model is from simply offering vanilla buy-and-hold strategies involving stocks, the more uneasy FINRA is going to be with you. You don’t even have to go far off of this center to find yourself the target of what I would call undue scrutiny. I’ve seen cases where a firm is simply selling [municipal bonds] and FINRA started to become uneasy.”

Wolper says perhaps his biggest issue with the current style of FINRA enforcement activity is that it all occurs within a very rigid and formal framework.

“They won’t sit down across the table for an honest, open background conversation about a business model or why a business is set up a certain way,” Wolper suggests. “Instead, you generally will have to do all the communications under a strict set of disclosure rules. There are severe consequences for failing to response accurately, timely and completely in this context, which really puts firms on edge during the entire review process. Formal communications are important in the review process, of course, but the current system in my opinion really makes it hard for firms to explain themselves fully and clearly. It stifles dialog, whereas if you just sit the parties down and have a frank conversation about the business model, what FINRA may perceive as a risk, about what is being understood or not understood, that can be so much more effective.”

Wolper’s work also involves working with advisers and firms registered with the Securities and Exchange Commission (SEC). While there are significant differences between the ways SEC and FINRA operate, he says some of the same challenges are present.

“On the adviser side, adequate disclosure is the key and the cure for SEC scrutiny,” he says. “So, adequate disclosure has really been the focus for advisers and the regulators watching them. Adequate disclosure has been a moving target, I would say, and this is something that has challenged advisers over time. They have different challenges from what broker/dealers face. On the brokerage side, FINRA is happy to second guess your decisions much more than the SEC, I would say.”