In response to recent highly-publicized scrutiny of bank cross-selling practices, FINRA announced in October 2016 that it is conducting a sweep of broker-dealers to determine the extent to which they are:
- promoting bank products of affiliated or parent companies to broker-dealer retail customers; and
- adding different features to broker-dealer retail customer accounts such as securities-based loans, or opening additional broker-dealer accounts.
A copy of the sweep letter may be found at the following link on the FINRA website: http://www.finra.org/industry/review-cross-selling-programs.
The sweep letter has a very broad scope, and requests a wide range of information about broker-dealer policies, procedures and practices relating to cross-selling, including the potential compensation to employees for such cross-selling. In light of recent events, the sweep letter conveys a particular interest in determining whether any of these products were sold without customer authorization.
The inquiry also requests copies of marketing materials used by broker-dealers to advertise bank products that are subject to the sweep. Of course, for some market participants with a robust array of financial products, the amount of documents required to be delivered under the sweep could be somewhat voluminous.
The inquiry mentions “bank products” without defining that term. On its face, the term would appear to cover structured products and instruments such as CDs and structured bank notes, which are issued by a bank. However, the term may not necessarily cover structured notes issued by a bank holding company. That being said, because the letter also refers to broker-dealer parent companies, the request arguably relates to structured notes and other instruments issued by parent corporations, particularly in light of the potential conflicts of interest that can arise from cross-selling programs.
To a significant extent, this new sweep letter requests information that may have been provided to FINRA through prior sweeps. For example, February 2016’s sweep relating to firm culture (http://www.finra.org/industry/establishing-communicating-and-implementing-cultural-values) requested information as to a variety of compensation practices that could impact how sale determinations are made. Similarly, FINRA’s August 2015 sweep relating to compensation and conflicts of interest (http://www.finra.org/industry/conflicts-interest-review-compensation-and-oversight) explored the manner in which some compensation programs may inappropriately incentivize financial advisors to sell products that may not be appropriate for customers.
The recent publicity concerning cross-selling programs likely reflects a concern on FINRA’s part that its prior guidance may not have been properly followed, and its concerns not properly addressed, with respect to these types of programs. The results of the sweep, and any follow-up actions by FINRA, may reveal the extent to which FINRA is satisfied as to the efforts that broker-dealers are making regarding the conflicts of interest that may arise in these types of incentive programs.