5 Common Compliance Mistakes
When I was a regulator, we would meet each week to discuss the cases being considered for Enforcement referrals. It was surprising how often the same types of cases would come before us. These were not always headline grabbing, but they were avoidable items that came up over and over again. I thought it might be helpful to share my Top 5.
Use of Discretion without Written Authorization
In its 2018 Common Examination Findings publication, FINRA noted that they saw many cases where representatives exercised unauthorized discretion by “placing trades in a single security across multiple customer accounts in a short period of time.” They also found many cases of representatives “executing transactions in customer accounts as an accommodation without receiving specific customer authorization.” Remind your representatives of your policies regarding the use of discretion and the need to receive prior written authority.
Like unauthorized discretion cases, accommodation forgeries were frustrating. Representatives often thought they were helping customers by not troubling them with having to sign multiple documents. However, by signing the document for the customer they violated their firm’s procedures and industry rules, and they put the firm and themselves at risk. Customer signatures are meant to authorize transactions or verify that customers were made aware of important disclosures. Make your representatives aware that the small amount of time that they will save the customers is not worth the embarrassment and cost of an Enforcement action.
Inadequate Outside Business Activity Assessments
Outside Business Activities (OBAs) continue to be a regulatory priority. FINRA has begun to focus their attention on the assessments that firms make of reported OBAs. Firms are required to conduct an inquiry into each reported OBA to determine, among other things, whether the activity creates conflicts with the firm or its customers, or whether it should be treated as a private securities transaction. It is important that firms conduct thorough reviews of reported OBAs, especially when the activity is the type that involve customers of the firm, could involve raising capital or that involve products that could be considered securities (e.g. real estate, digital assets, etc.).
Failing to Identify and Supervise High Risk Representatives
It’s no secret that regulators are paying close attention to high risk representatives. They have spent a significant amount of effort developing tools and analytics for identifying these individuals and they are conducting targeted examinations. Firms should have defined criteria for determining when a representative should be placed on heightened supervision and to make sure they are consistently applying these criteria. In addition, make sure heightened supervisory plans are tailored to the risks identified and (importantly) that the plans are being carried out and documented.
Having Good Procedures and Failing to Implement Them (especially in branch offices)
Regulators have stepped up the number of branch office examinations they are conducting. One of the objectives of these reviews is to make sure that the steps that you have outlined in your Written Supervisory Procedures are being implemented in the field. Your procedures are only effective if they are correctly being carried out. It is helpful to create workflows based on your procedures that ensure that each step is being carried out and documented. There are automated tools such as Oyster Solutions that can help you do this.
These types of cases can be avoided with careful attention and effort. Our experts have years of industry experience and can quickly assess through thoughtful and skillful questions what areas of your compliance program and supervisory procedures need the most attention and review.
Oyster Solutions software can turn your Compliance Program into actionable, customized workflows that help you assess and manage risks, and automate compliance so that you can sleep better at night.
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About the Author: Ed Wegener is an innovative compliance, risk management and supervisory controls expert with deep understanding of Federal Securities Laws and the rules of self-regulatory organizations, as well as technology optimization and risk mitigation. Prior to joining Oyster, Ed held several posts in FINRA, most recently as Senior VP and Midwest Regional Director. While there, he was responsible for the Region’s risk assessment, examination and investigation programs. Ed was a member of the team that developed FINRA’s risk-based examination program and he developed and managed FINRA’s first Digital Asset and Cybersecurity examination programs.