FINRA Warns Investors of Sales-Oriented Call Centers

According to a ThinkAdvisor article from last week, the Financial Industry Regulatory Authority (FINRA) has put out a warning to investors regarding call centers. Typically staffed by securities professionals, these centers are “sales-oriented” and use aggressive tactics to sell securities and investments to unsuspecting investors. Many investors with smaller accounts ($100,000 to $250,000) are being pushed into call centers instead of relying on a live advisor. FINRA stated that the compensation structure for some call centers “creates incentives for center brokers to sell certain investment products or to bring in new money to existing accounts.” These are the concerns FINRA reported:


Aggressive sales tactics that can differ from the prior client interactions

Failure to gather client suitability information

IRA rollovers presented as “free” or involving “no fees”

Mutual fund switches that may not be suitable for investors

Misrepresentations and omissions of key information, such as the name of the fund being recommended, expense ratios and sales charges

Failure to disclose information of different share classes and associated expenses

Inadequate supervision of call center representatives.

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FINRA Makes Changes to BrokerCheck

The Financial Industry Regulatory Authority (FINRA’s) BrokerCheck just got a lot easier to navigate. BrokerCheck is a free advisor directory which tells if the broker is licensed, and any disclosure events that might be on his or her record. Any investor can use it, and can be able to tell if the broker has been sanctioned or not. A new visual treatment also warns investors of those advisors who have been barred from the industry. It also lists all of the firms where the broker has been registered. About 7% of advisors have some sort of misconduct and research shows that those with at least one instance of misconduct are five times more likely to engage in it in the future compared to another. BrokerCheck does not disclose advisor terminations, actual scores earned on licensing exams and sometimes bankruptcy filings and tax liens.

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FINRA To Switch Focus From Firms to Bad Brokers in 2017

According to a recent article in Financial Advisor Magazine, the Financial Industry Regulatory Authority (FINRA) will be focusing less on brokerage firms in the coming months, and more on specific bad brokers within those firms. The regulatory authority released its exam priorities letter on Wednesday, and stated that exams will “devote particular attention to firms’ hiring and monitoring of high-risk and recidivist brokers,” a change from last year’s overall brokerage supervisory culture being a top priority. FINRA stated it will continue to focus on product suitability and concentrations, especially with senior investors in the coming year. It also promises to review firm compliance with customer reserve rules for segregating customer assets and will remain concerned about the potential impact from rising interest rates. New this year will be a promise to review firm compliance with customer reserve rules for segregating customer assets.

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FINRA Targets Peddlers Of Variable Annuities In 2017

According to Financial Advisor Magazine, the Financial Industry Regulatory Authority (FINRA) is again targeting those firms that engage in “excessive and short-term trading of long-term products,” including variable annuities (VAs). With brokers continuing to tout these long-term investment vehicles as short-term ones, in order to generate larger, back-end fees for themselves, many customers are being forced to pay commissions and fees that they would not necessarily, otherwise. This is also against securities rules and regulations. VAs are long-term products and should not be held for less than five years. If a VA is held for less than five years, chances are, the broker and/or investment firm is not doing its due diligence on the investment vehicle and could be taking advantage of the customer. Below, Andrew Stoltmann discusses some of these issues with FA Magazine today at the link below:


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FINRA Rule Approval: Panel Selection in Customer Cases with Three Arbitrators

The Securities and Exchange Commission (SEC) approved amendments to FINRA Rule 12403 (Cases with Three Arbitrators) of the Code of Arbitration Procedure for Customer Disputes (Customer Code) to increase the number of arbitrators on the public arbitrator list that FINRA sends to parties during the arbitration panel selection process from 10 to 15. The amendments also increase the number of strikes to the public arbitrator list from four to six, so that the proportion of strikes is the same under the amended rule as it is under the current rule. The amendments will become effective for all arbitrator lists FINRA sends to parties on or after January 3, 2017, for panel selection in customer cases with three arbitrators.

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FINRA Increases Number of Public Arbitrators

On Thursday, the Securities and Exchange Commission approved amendment to Financial Industry Regulatory Authority (FINRA) rules to increase the number of public arbitrators on the list the regulatory body sends to parties during the arbitration panel selection process. There will now be 15 names, up from 10. The parties may also now “strike” six candidates, up from four. FINRA amended its rules so that parties could have “a greater choice of public arbitrators during the panel selection process.” FINRA proposed the amendments to this rule in July of this year.

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Morgan Stanley Mandatory Arbitration Clause Facing Lawsuit

Morgan Stanley is facing a lawsuit that challenges the bank’s right to force its advisors to waive their right to sue the firm in courts. In September, the firm was denied a motion to stay or stop a suit against its internal arbitration program. The motion to stop the suit was denied, and the suit was originally brought last year by one of its former financial advisors. The suit targets Morgan Stanley’s internal mandatory arbitration system, called Convenient Access to Resolutions for Employees (CARE). The system forces employees to take claims involving breach of contract or fiduciary duty, wrongful termination and statutory discrimination into private arbitration managed by JAMS, a for-profit, dispute resolution provider. Morgan Stanley made CARE mandatory last October, while before, it was voluntary for 10 years. Advisors had 30 days as of September 2nd last year to opt out of the program, until a former advisor sued them in 2013 a day before the opt-out deadline, claiming the CARE program discriminated against employees. Charles Schwab and Merrill Lynch launched similar programs in the past.

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FINRA Cracks Down on Cross-Selling; Looks into Incentives Brokers May Receive for Promoting Products of Parent Company

According to a recent InvestmentNews article, the Financial Industry Regulatory Authority (FINRA) is conducting a sweep of broker-dealer firms to find out what sort of cross-selling programs are offered. Specifically, FINRA is requesting data from broker-dealers about incentives they offer employees to promote bank products of an affiliate or parent company to broker-dealer retail customers through referrals or direct sales. FINRA is also looking for incentives to sell additional features, such as credit cards, securities-based loans or checking accounts. The regulator is looking for data from January 1, 2011 through September 30, 2016 from broker-dealers by November.

It will ask for a description of metrics used to track and evaluate employees; performances related to cross-selling programs, and the application of those metrics to performance ratings, promotion and termination decisions, a list of employees terminated or disciplines for not meeting production goals or for engaging in improper activities related to cross-selling and a list of investor complaints, litigation, arbitrations or internal disciplinary or other actions related to the cross-selling program, among other things. This crackdown comes in part after the wake of the Wells Fargo cross-selling scandal, for which authorities fined the bank $185 billion on September 8th for a program that led employees to open nearly two million new deposit and credit-card accounts without customer knowledge or authorization.

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Artificial Intelligence Soon To Be Used to Catch Violators in Financial Industry

According to Reuters, the financial market will soon be using artificial intelligence (AI) to catch those who cheat in the financial markets. Machine learning and other avenues will be used to act as surveillance tools to weed out those who violate laws. Because the financial market is so wracked with fraud, artificial intelligence will be helpful in spotting trade irregularities and violation patterns, beginning this year. The AI will be used by NASDAQ and the London Stock Exchange, as well as the Financial Industry Regulatory Authority (FINRA), the regulatory authority that is also developing it. Reuters reported that financial firms already use the systems for monitoring their own firms’ compliance issues, but regulatory groups are just beginning to work with AI.

Currently, FINRA looks out for potential rule violations by scanning for 270 patterns among stock orders, modifications, cancellations and trades, covering about 50 billion market “events” each day. Sometimes, there are false alarms with the red flags. FINRA also uses an algorithm to look for irregularities. If something is detected, a staff member is supposed to investigate further, but sometimes this does not happen because of the overwhelming number of incidents that occur. The new machine learning technique would enable surveillance based on rules the software generates itself by evaluating previous trading patterns that led to charges being filed. The regulators are anxious to discover possible manipulative schemes they aren’t even aware of. These new tools may give them a better view into the market for those scenarios. Detecting order and cancellation “layering” and real-time comparison of activities across exchanges and markets are other strategies that may be employed with the AI system.

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New Bill to Fight Elder Fraud Proposed by FINRA

Recently, the Financial Industry Regulatory Authority (FINRA) proposed a new bill to help fight financial elder fraud. These new rules will require financial firms to report suspected exploitation of seniors to regulators and to acquire contact information for a trusted contact person for seniors’ accounts. It will also propose legislation that would allow financial firms to place a temporary hold on disbursement of funds or securities whenever it seems that harm may result to a senior investor. It would also require FINRA to amend its New Account Application Template to include a trusted contact’s information. The rules do not authorize notifications to third parties, nor allow securities brokers or advisers to place an initial delay of disbursements from an account if financial exploitation is suspected. The rules must now be approved by the Securities and Exchange Commisssion (SEC).

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