FINRA Alert: 2018 Enforcement Priorities Announced

Earlier this month, FINRA (the Financial Industry Regulatory Authority) announced its enforcement priorities for the coming year. The priorities will set the course for FINRA’s investigators as they inquire, examine, probe and sometimes bring enforcement actions against financial services professionals and their firms.

As a service to our readers—both investors and financial services professionals—we are highlighting FINRA’s priorities here, and we invite you to contact us with your specific questions and concerns.

FINRA will be taking a careful look at the following items, which can be broadly categorized as having to do with compliance, supervision and risk management:

• Fraud: FINRA has long allocated significant resources to detecting and rooting out fraud. This year, it identifies specific fraudulent activities including “insider trading, microcap pump-and-dump schemes, issuer fraud and Ponzi-type schemes” that both “harm investors and damage the integrity of the market.” As part of FINRA’s continued focus on fraud, it “reminds firms of their obligation to file a Suspicious Activity Report (SAR) for illicit activity involving the exploitation of senior investors.”
• High Risk and Recidivist Brokers: Building on the work it began in 2017, FINRA has identified as a “top priority…identifying high-risk firms and individual brokers and mitigating the potential risks that they can pose to investors.” As part of this focus, FINRA “will also continue to focus on the risk that these firms and investors pose to investors, including unsophisticated or senior investors,” including through “recommendations for speculative or complex products by high-risk brokers to investors who may not have the necessary sophistication, experience or investment objectives.” We have written before about the phenomenon of bad brokers shuffling from one firm to the next while their firms sometimes get off unscathed, so our readers know this is not a new phenomenon.
• Sales Practice Risks: Brokers are only permitted to recommend investments that are “suitable” for their customers, considering their age, investment experience, investment objectives and risk tolerance. In the coming year, FINRA will prioritize enforcing this requirement. FINRA’s effort will include “reviewing how firms identify products that are subject to new product vetting, the vetting process itself, and the supervisory systems and controls firms put in place to ensure personnel are appropriately educated and trained on the sale and supervision of the product and that recommendations are suitable.” We wrote last year about the dangers of “overconcentration,” or the “too many eggs in one basket” problem, which is a core aspect of suitability, and we are glad to see FINRA will be working on the problem.
• In announcing its 2018 enforcement priorities, FINRA also reminds investors and financial services professionals that FINRA Rule 2165 “will become effective February 5, 2018,” permitting “members to place temporary holds on disbursements of funds or securities from the accounts of specified customers where there is a reasonable belief of financial exploitation of these customers.” This past year, we secured a significant recovery on behalf of a senior investor whose financial exploitation was made possible by the negligence of her brokerage firm. Money magazine featured the story. We expect that Rule 2165 will strengthen our efforts to protect vulnerable senior investors and assert their legal rights.

If you are an investor with questions about your broker’s background, whether you have been the victim of elder financial abuse, or whether your broker’s recommendations have been suitable for you; or if you are a financial advisor with questions or concerns about how FINRA’s enforcement priorities may affect you, please contact a securities attorney at The Galbraith Law Firm. Call 212.203.1249 or email kevin@galbraithlawfirm.com for a free confidential consultation regarding your legal rights.