Don’t Forget About FINRA

The agency hasn’t exactly dominated trade publication headlines in recent months, but it remains active on enforcement and rulemaking efforts that will impact retirement advisers.

A quick review of FINRA’s website shows the agency is every bit as active as others that police financial markets and investment services providers, despite a more muted trade media presence.

Like the Department of Labor (DOL) and the Securities and Exchange Commission (SEC)—two agencies winning the lion’s share of provider attention through a focus on fiduciary standards and fund reform—FINRA’s jurisdiction hangs over the retirement advisory industry in important ways.

With authority handed down directly from Congress, rules from FINRA help govern the activities of more than 4,025 securities firms in the U.S., covering approximately 638,880 brokers. Even professionals who aren’t directly beholden to FINRA depend in no small part on the agency’s mission of promoting fair financial markets, complete disclosure and truthful product advertisements.

According to FINRA’s own count, the agency’s “aggressive vigilance” brought almost 1,400 disciplinary actions against registered brokers and advisers during 2014, resulting in a combined $134 million in fines. Another $32.3 million in restitution was ordered by the agency, while it also referred more than 700 fraud and insider trading cases to the SEC and other agencies for litigation and/or prosecution. The most recent charge listed on the FINRA website is dated August 24 and involves $2 million in fines for Charles Schwab & Co. Inc. for net capital deficiencies and related supervisory failures.

Beyond policing adviser/broker misbehavior, current points of focus for FINRA are varied, from a rethinking of the agency’s enrollment examinations to its own considerations about implementing stricter conflict of interest standards. In a particularly rare move, FINRA recently weighed in on the DOL’s fiduciary rule proposal in a formal comment letter. The agency says it supports the DOL’s goal of reducing conflicts of interest in the investment advisory space, but it has some doubts about the current form of the rule proposal.

NEXT: Inside perspective 

As explained by Grace Vogel, former FINRA executive vice president for member regulation, who now works as senior strategy and policy adviser in the PwC Financial Services Regulatory Practice, the agency is worried that the DOL fiduciary rule proposal doesn’t acknowledge the importance of commission-based relationships—especially when it comes to opening up access to individual retirement accounts (IRAs) for lower-income individuals. The same argument has been widely pushed by providers

The FINRA comment letter cites a 2011 study in which the agency found 98% of IRA accounts with less than $25,000 were created as commission-based brokerage accounts. FINRA goes on to argue the DOL proposal’s treatment of differential compensation “should be simplified by offering financial institutions a choice: either adopt stringent procedures that address the conflicts of interest arising from differential compensation, or pay only neutral compensation to advisers.”

Vogel says FINRA is also concerned that the fiduciary rule’s forward-looking fee calculation requirements may put brokers into noncompliance with separate FINRA rules that ban certain forward-looking performance projections. The point is covered in the FINRA comment letter, Vogel observes, and she feels the matter stands about as good a chance as any other to actually drive changes in the DOL fiduciary rulemaking language.

“I expect the DOL very well may listen to this concern,” she tells PLANADVISER, “because it seems pretty clear that the new requirements for fee projections could in fact put advisers or brokers into conflict with important FINRA rules. The DOL will need to iron this out.”

Overall, though, Vogel does not expect major changes to the DOL fiduciary rulemaking effort, driven by FINRA or otherwise. “There is another two-week comment period which starts to run as soon as the hearing transcripts are posted online,” she notes. “I don’t expect much will change or that anything groundbreaking will come out, considering how much testimony and commentary DOL has received to this point.”

Vogel says the pace of implementation of the fiduciary rulemaking will undoubtedly surprise some advisers. “I still see so many firms that have stuck their head in the sand and refuse to acknowledge that a rule is eventually going to be adopted,” Vogel warns. While she feels the rule implementation will be somewhat disruptive, she is also confident that the industry’s own projections that implementing the rule will cost nearly $4 billion (or 20-times the DOL’s estimates) are overblown.

NEXT: FINRA of the future 

Beyond speaking with its former leadership, another important window into the inner workings of FINRA is the annual regulatory and examination priorities letter, introduced this year by FINRA Chairman and CEO Richard Ketchum.

Ketchum’s introduction highlights both “emerging and existing risks” that FINRA is following and which, if not properly addressed, could adversely affect investors and market integrity.

“Since we began publishing the letter [in 2005], broker/dealer operations, the markets and regulators have undergone significant changes,” Ketchum says. “Many of these changes are positive, including improvements in firms' new-product reviews, increased market transparency and advances in risk-based approaches to regulation. Nevertheless, we also continue to observe shortcomings in five key areas that compromise firms' and registered representatives' ability to protect investors and the integrity of the market.”

Ketchum identifies the five focus areas as alignment of firm and customer interests; improvement of standards of ethical behavior; development of strong supervisory and risk management systems; fairer development, marketing and sale of novel products and services; and more effective and transparent management of conflicts of interest. According to Vogel, comprehensive evaluation of these five areas will help firms get ahead of many of the concerns driving FINRA staff and leadership.  

Echoing Ketchum’s letter, Vogel notes FINRA is also beginning to explore more specific areas of concern around the sale and supervision of interest-rate-sensitive and other complex products, as well as controls around the handling of wealth events in investors' lives, management of cybersecurity risks and maintaining robust oversight of trading technology and other platforms that interact with markets.