FINRA got out of the gate quickly in 2013, publishing its examination priorities earlier than usual. While it’s no surprise that those priorities focus on protecting retail investors, that focus is very much in the context of increasingly complex products and a continuing slow growth, low-interest rate market environment.
As a starting point, FINRA is concerned that registered representatives may not fully understand the products that they are selling and their inherent risks. This seems inconsistent with a broker-dealer’s obligation to evaluate whether products are suitable for their clients, including their risk tolerance. So FINRA is likely to focus on a broker’s understanding of the product and the due diligence undertaken to assess investors’ risk tolerance.
They will also be looking at how sales of particular products could affect a broker’s compensation. In other words, does it create a potential conflict of interest? And are member firms adequately supervising their representatives, particularly in high risk activities. In short, FINRA continues to execute on its risk-based examination program across all areas under their jurisdiction.
It would be worthwhile for FINRA member firms to review their systems and procedures against FINRA’s examination priorities and take the opportunity to improve them when appropriate.