Sales Practice Risks in FINRA’s 2018 Regulatory and Examination Priorities Letter

By: Esmat Hanano, IAC Intern Spring 2018

This is the fifth and final post in a series of blog posts about the Financial Industry Regulatory Authority’s (“FINRA”) 2018 Regulatory and Examination Priorities Letter (“Letter”). This post will discuss the sales practice risks that FINRA has identified for 2018. The sales practice risks that FINRA identifies is the most important section of the Letter for retail investors because it will alert them to unsavory investment opportunities. This year, there are two main areas that FINRA wants member firms to focus on with their sales practices: suitability and cryptocurrency offerings.

Suitability is a perennial area of concern for FINRA. As investment vehicles continue to grow more complex, the threat of improper vetting and recommendations becomes higher. FINRA will evaluate the process that member firms use to vet new investment vehicles before offering them to customers. FINRA will also focus on the procedures that firms use to recommend investments to unsophisticated and vulnerable investors. Further showing the importance of monitoring complex investments, FINRA will monitor two investment vehicles: unit investment trusts and employer-sponsored retirement plans. Unit investment trusts have already been covered in a previous post. Employer-sponsored retirement plans are such an integral part of many investors’ lives that FINRA will be paying close attention to the recommendations that members make in those retirement accounts.

With all the attention cryptocurrency is receiving, FINRA has decided to make monitoring initial coin offerings and digital assets a priority for 2018. The hot trend in the securities market right now is Bitcoin and other forms of crypto currency. However, given the lack of understanding by the general public on how they function, FINRA rightly notes this area of securities trading as a potential sales practice risk. FINRA will examine supervisory, operational, and compliance procedures to ensure that member firms are meeting their obligations under federal law and FINRA regulations.

Suitability and cryptocurrency will continue to be important areas for FINRA as the securities market becomes comfortable with the idea of cryptocurrency. FINRA’s monitoring of these areas is only likely to grow in the coming years because of the growing interplay between suitability and cryptocurrency.