WASHINGTON -- FINRA is seeking comment on a revised proposal that would require brokers to disclose to clients the compensation they receive when jumping to a new firm.
Under FINRA's latest proposal, a recruiting firm that hires away a registered representative would have to provide "educational communication" to clients whose assets they are seeking to bring into the practice along with the rep.
That proposed rule, released Wednesday, would aim to provide clients with a better understanding of the incentives brokers receive when switching firms and shed more light on potential conflicts of interest.
The same day, FINRA officials here at the industry regulator's conference outlined a number of other concerns and priorities they have identified in the broker and advisor space, including firm culture, cybersecurity and issues involving senior clients.
Susan Axelrod, FINRA's executive vice president of regulatory operations, put firms on notice that the organization's examiners draw on a variety of sources of information as they evaluate a practice, and make a sharp distinction between the firms that are forthcoming in the review process and those that try to stonewall the regulator.
"We have much more of a sense than I think firms think of what the true culture is, and I will tell you, firms that are always withholding documents, firms that are always slow to produce, don't really want to work with us and be transparent in what's happening -- that says a lot about the culture," she says. "Other firms that self-report and have issues and say, here's the problem, and here's how we're dealing with it. That also says a lot about the culture."
Particularly at small firms, it's critical that the leaders of the practice set the "tone from the top" in terms of compliance, according to Mari Buechner, president and CEO of Coordinated Capital Securities, an independent broker-dealer based in Wisconsin with about 75 reps.
"If the leadership is perceived as taking shortcuts then your team is going to take shortcuts, and then the reps in the field who choose to are going to find those shortcuts," Buechner says. "So leading by example is extremely important."
FINRA is also taking a growing interest in how the firms it oversees are protecting their information systems, and what policies and procedures they have in place to prevent, detect and respond to a security breach.
Earlier this year, FINRA and the SEC each published the results of a series of sweep exams evaluating firms' cyber defenses. FINRA's report highlighted what might be viewed as best practices in the security arena, including a strong governance framework, vetting third-party vendors and conducting ongoing employee training.
- Read more: SEC, FINRA Warn on Cybersecurity
On Wednesday, Axelrod explained that FINRA is still on a fact-finding mission as it approaches cybersecurity, and instead of looking for specific technical systems, the regulator is interested in "engaging in dialogue with firms" to better understand their defense posture.
"We're going to look to see what's the level of sophistication that the firm's undertaken to review these issues. Have they hired the right level of expertise? Often we'll look in the audit department and see what kind of expertise is there as well to audit for these type of issues, and make sure there's testing of the systems. It's really information gathering from our part," she says.
"[The] expectation is a real dialogue around cyber, giving firms the opportunity to talk about the steps they've taken," Axelrod adds.
The needs of senior investors are also the subject of mounting concern at both FINRA and the SEC. With some 10,000 Americans turning 65 each day, the regulators are looking to make sure that advisors are recommending suitable products for aging clients, and are evaluating steps they can take to guard against financial abuse.
Last month, FINRA set up a toll-free helpline for seniors, family members or others to call in with questions about their brokerage accounts or investments. Axelrod says that senior issues will remain an area of concern for "years to come."
It's a long list of priorities at FINRA. Axelrod notes that the group is also looking into firms' anti-money laundering policies, how they are managing conflicts of interest, conducting due diligence on new products, and what type of background checks they are running on new reps.
- Read more: FINRA to Brokers: Put Client Interests First
The broker compensation initiative revives an earlier effort from FINRA to enhance disclosure requirements that was eventually shelved amid opposition from some industry members.
Under the new proposal, "the recruiting firm would be required to provide the educational communication at or shortly after the time of first contact with a former retail customer regarding the transfer of assets to the recruiting firm."
FINRA is accepting comments on the proposed rule through July 13.
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