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Banking and Finance

Morrison & Foster Client Alert: FINRA Provides Early Guidance About Its Exam Priorities; Firms Should Take Notice

By Jay G. Baris, Hillel T. Cohn, Kelley A. Howes, and Daniel A. Nathan

In its annual summary of regulatory and examination priorities, the Financial Industry Regulatory Authority (FINRA) signaled that it will aggressively pursue market misconduct. The January 11, 2013 report follows closely on FINRA's recent announcement of the increased high profile regulatory and disciplinary actions it brought in 2012. Member firms should carefully review their compliance policies and procedures in light of FINRA's stated areas of focus.

Consistent with its mission of protecting investors by ensuring that the securities industry operates fairly and honestly, FINRA's priorities focus heavily on retail investors as well as supervisory issues and regulation and operations of increasingly complex systems, products and markets.


FINRA is concerned about the potential for sales practice abuses that may result in the current slow growth, low-interest rate market environment. In particular, FINRA believes that member firms and their associated persons may not fully understand the risks inherent in complex products that they offer to retail investors. Accordingly, FINRA will focus its examination efforts on compliance with its recently revised suitability rule (FINRA Rule 2111).

FINRA emphasized that broker-dealers and their associated persons who sell complex products must adequately understand the products and their inherent risks. This understanding is essential because broker-dealers must have a reasonable basis to recommend a financial product and to evaluate its suitability for a particular customer.

FINRA exams typically will focus on a broker's understanding of the product, due diligence in assessing investors' risk tolerance, and, in keeping with its recent theme of supervising conflicts of interest at broker-dealers, how particular product sales could affect a broker's compensation (for more information on conflicts of interest, see our recent News Bulletin regarding FINRA's sweep examination). The annual summary also expresses FINRA's concern that brokers may fail to explain to customers the risk-versus-return profile of certain products, and specifies the need to explain the market risk, credit risk and liquidity risk of complex products. FINRA identifies several products, including business development companies (BDCs), leveraged loan products, structured products, exchange-traded products, closed end funds and variable annuities that provide particular opportunities for abuse.

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© Copyright 2011 Morrison & Foerster LLP. Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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2013 01-17 FINRA Provides Early Guidance About Its Exam Priorities.pdf