FINRA is challenging brokerage firms to better align their business practices with the interests of their customers, cautioning that a failure to do so undermines the integrity of the market and invites regulatory scrutiny.
The industry regulator this week issued its annual regulatory and examinations priority letter, outlining for brokers several broad areas of concern, including ethical standards and risk management systems within firms, conflicts of interest, and the promotion and sale of novel products and services.
In its call for orienting the firm's practices toward the customers' interests, FINRA once again is using language similar to the "best interest" fiduciary standard that applies to registered investment advisors regulated by the SEC.
Following the enactment of the Dodd-Frank Act, the SEC has been evaluating whether to adopt a uniform fiduciary standard that would apply in equal measure to broker-dealers and advisors, in a bid to tighten the current suitability standard that applies to the brokerage sector.
But with SEC action on a uniform standard far from certain, FINRA is urging brokers to embrace a culture that orients business practices with customer interests.
"A central failing FINRA has observed is firms not putting customers' interests first," FINRA writes in its letter. "Irrespective of whether a firm must meet a suitability or fiduciary standard, FINRA believes that firms best serve their customers -- and reduce their regulatory risk -- by putting customers' interests first. This requires the firm to align its interests with those of its customers."
Among the other areas of concern FINRA identifies in its letter are high-frequency trading, cybersecurity and the sale of complex products such as alternative mutual funds.
FINRA also signaled its intention to scrutinize the brokerage sector for bad actors preying on vulnerable investors, such as the elderly, and bar them from the industry "in an expeditious manner."
FINRA Chairman and CEO Richard Ketchum notes that over the decade that the organization has been publishing its exam priorities letter, the industry has undergone substantial upheaval, including shifting broker roles and new regulatory considerations. On balance, Ketchum says firms need to do more to update their culture and operations to better serve investors and move away from the pursuit of short-term profits in favor of sounder products and investment strategies.
"While we have seen some firms make great progress in keeping up with these changes, more attention needs to be paid to addressing specific challenges we've pinpointed," Ketchum says in a statement.
"Doing so will provide the building blocks for a stronger culture of compliance, while indifference to or inaction on these issues will only serve as stumbling blocks toward robust compliance and supervision programs," he adds.
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