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FINRA's Axelrod explains examiners' priorities

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Now is not the time for broker-dealers to be cutting compliance budgets, a FINRA executive warned this week.

As firms weigh costs, "decision makers may be tempted to consider cuts in the compliance area, to delay critical technology initiatives or to outsource key functions," FINRA executive vice president Susan Axelrod said in prepared remarks at a legal continuing-education seminar. "But firms should remember that cutting too much now will likely cost more in the future."

Revised examination procedures and new concerns about complex products and conflicts of interest are high on the group's list of priorities, Axelrod said.

Among the areas that Axelrod highlighted:

  • Complex products: As institutions rush out products to satisfy consumer demand for higher yield, FINRA says it is actively keeping an eye on the way these are sold to clients. Among the items FINRA examiners are focusing on are " including principal-protected notes, non-traded REITs, reverse-convertible notes, structured notes, and leveraged and inverse ETFs," Axelrod said, citing recent sanctions for firms that recommended these complex products to relatively unsophisticated or conservative investors.
  • New rules on suitability: Two new rules took effect in July to govern the way advisors assess and recommend investment products to clients: Rules 2090 and 2111. Firms need to make sure they are training staff to comply with these rules, Axelrod said.
  • Cyber security: As more consumers expect greater online access to their finances, firms need to be sure they are protecting client privacy and security. Axelrod cited FINRA enforcement action over the past few years against firms that failed to protect customer information.

Axelrod's warning may be unnecessary, said industry analyst Chip Roame, managing principal of Tiburon Strategic Advisors. "Almost all firms are boosting compliance efforts," he said in an email. "Few to none are cutting back."

According to FINRA's data, the organization has been increasing its regulatory activity over the last five years. New disciplinary actions have risen from 1,177 in 2007 to 1,488 in 2011; individual suspensions have climbed steadily from 288 to 475 over the same time period.

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