Finra Ends Probe of Bank Product Sales with No Enforcement Referrals
The Financial Industry Regulatory Authority has ended its sweep investigation of incentives broker-dealers offer employees to cross-sell products of bank affiliates with something of a whimper.
After two years of reviewing sales practices at 14 broker-dealers—extending to how many employees may have been terminated or disciplined for not meeting production goals and how many customers had bank accounts or features added without their authorization—the self-regulatory group has no plans to make enforcement recommendations.
“We felt that the incentives were generally reasonable and the controls were evolving in the right direction,” Finra’s Northeast regional director Michael Solomon said at a “hot topics in compliance” panel this week that was sponsored by Sifma, the securities industry’s main trade group.
Finra opened its “targeted examination” two years ago, shortly after Wells Fargo & Co. disclosed a $185 million settlement with regulators over branch banking employees’ opening of fake bank accounts to meet production goals.
“On the heels of this Wells Fargo thing, part of this sweep was to see if there was an issue of unauthorized accounts,” Solomon said. “Happily, we didn’t see any evidence of that.”
But examiners did find some cross-selling practices that Finra has flagged to firms and expects to see remediated, he said.
They included local branch sales contests that were not approved by compliance departments, regional sales contests instigated by internal marketers that rewarded funded mortgages and credit-line draws, and “rubber-stamped” suitability reviews for securities-based loans, including some to senior investors whose liquid net worths were lower than the loans issued to them. Solomon also cited bonuses to branch managers based in part on meeting net-interest revenue goals from securities-backed lines of credits and mortgages.
“There were some cases where there were essentially no SBLOCs rejected,” he said.
Closing a sweep without a referral to enforcement is somewhat unusual, according to securities industry lawyers.
“Generally if you invest the resources into it, you’re going to try hard to find something on which you can bring action,” said Daniel Nathan, a partner at Orrick, Herrington & Sutcliffe, who has been an enforcement director at both Finra and the Securities and Exchange Commission.
Finra enforcers have levied multi-million dollar fines against several firms and brokers over sales practices involving unit investment trusts, following targeted examination letters it sent to firms in September 2016.
Neither Solomon nor Finra spokespeople would name the 14 targeted firms in the cross-marketing sweep. Morgan Stanley in April 2017 agreed to a $1 million sanction from the state of Massachusetts for ginning up sales of portfolio-backed loans through its bank affiliate.
Finra has not yet decided whether to issue a summary report on its findings that might help firms refine their compliance procedures, Solomon said. But he reminded his audience of legal and compliance officials that it’s “a very good practice to try to determine which reps are outliers” in ringing up sales.