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A Summary of FINRA’s 2018 Report on Examination Findings

Last week, FINRA issued its 2018 “Report on FINRA Examination Findings.”  This report tracks FINRA’s 2018 Priorities letter, which this blog has previously covered.  Putting its member firms on notice, FINRA advised that it issued the report as another resource for firms to “strengthen their compliance programs and supervisory controls.”  Not surprisingly, the first highlighted observation is “Suitability for Retail Customers.” Specifically, FINRA reported that:

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Bye-Bye Bureaucracy, Hello Enforcement: FINRA Shakes Up the Structure of its Department of Enforcement

It was once said that “bureaucracy defends the status quo long past the time when the quo has lost its status.” FINRA, apparently a proponent of this idea, recently completed an overhaul of its Department of Enforcement’s structure in an attempt to create a “unified enforcement function.” Specifically, Susan Schroeder, FINRA’s head of enforcement, will head a single enforcement team charged with making decisions on investigations and penalties.

Prior to this consolidation, enforcement was split into two units. One was tasked with handling disciplinary matters concerning trading, and a second unit handled cases referred from FINRA’s other divisions, such as the Office of Fraud Detection.

The ultimate goal of this consolidation is “to facilitate more consistent decision-making and outcomes,” as well as “to better target developing issues that can harm investors and market integrity, and ensure a uniform approach to charging and sanctions.”  Additionally, independent commentators believe that FINRA’s new enforcement structure might make investigations shorter and increase transparency.

To savvy observers this consolidation will not come as a surprise. It is the result of FINRA 360, “FINRA’s ongoing comprehensive and improvement initiative” announced July 2017.  Consolidation of enforcement functions was listed, among others, as a way to make FINRA a “more effective, efficient regulator.”  Other FINRA 360 priorities include: Reporting on FINRA examination findings, reviewing engagement initiatives, and retrospective rule review.

It is unclear whether FINRA’s consolidation will achieve its goals. FINRA’s efforts, however, serve as a welcome sign to firms and commentators, as FINRA appears genuinely interested in improving its overall efficacy and efficiency.

Householding Accounts – Avoiding a Prohibited Transaction

Householding of brokerage accounts is a common practice. Clients like it because they can get reduced fees by aggregating all of their accounts. Broker-dealers like it because they get more assets to manage. But when retirement accounts are involved, broker-dealers need to be mindful of special rules that can adversely affect their clients…because unhappy clients don’t tend to remain clients for long.

The problem occurs under the prohibited transaction rules of ERISA and the Internal Revenue Code. They say that a fiduciary (i.e., the person in control of the account – the investor) can’t use retirement assets to obtain a personal benefit. With householding, the client gets a personal benefit when the combined value of both his or her retirement and personal accounts hits a breakpoint that reduces the fee on the personal accounts. In other words, the investor gets a personal benefit from the use of retirement assets.

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