Securities Lawyer Blog | Victim of Fraud?

TAG | Broker Dealer reporting systems

Jun/11

29

FINRA’S THREE C’S RULE: CONCENTRATION, COST, & COMPLEXITY

In a June 28, 2011, article written by Darla Mercado for InvestmentNews.com, she writes that Finra’s variable annuity suitability rule should be old news to broker-dealers, but firms that want to avoid an arbitration land mine ought to review their procedures.

This warning came from Andrew A. Favret, associate vice president and regional chief counsel at the Financial Industry Regulatory Authority Inc. Mr. Favret, along with Robert H. Watts, a Finra arbitrator and former compliance officer for John Hancock Financial Services Inc., held a boot camp on annuities at the Insured Retirement Institute’s Government, Legal & Regulatory Conference in Washington June, 27th. Both shared tales of broker-dealers’ missteps on following VA suitability rules and highlighted the red flags that likely would bring a firm under Finra’s suspicion.

“It’s funny how often firms have good procedures [for sales practices] and the reps will say they’ve never seen them,” Mr. Favret said. “Firms need to be able to show they have good procedures and that they’re getting the word out to their reps.”

Occasionally, Ms. Mercado writes, broker-dealers have been caught with outdated supervisory procedures and standards of conduct, and have been unable to give Finra an adequate explanation as to how the procedures were drafted or who exactly is responsible for ensuring that reps follow the rules. In some cases, the person responsible for providing supervisory approval at a broker-dealer had left the firm years ago, Mr. Favret said.

“Whenever Finra finds something, they look at who’s the nearest principal,” said Mr. Watts. “What did they do? What should they have done?”

The common pitfalls for firms include failure to have written supervisory procedures, failure to have appropriate policies and steps to assess suitability, and failure to document complete suitability information.

Mr. Favret also highlighted “the three C’s” that help determine whether Finra will pursue a case: concentration and how a firm justifies placing upward of 50% of a client’s net worth into a VA; costs and whether the rep took that into account when either selling or transferring a VA; and complexity — whether the customer knows what he or she is buying.

Finally, Finra began an initiative this year where it combed through data from five or six major VA issuers for data on concentration levels and the sales of VA riders, Mr. Favret said. It’s a way for Finra to highlight problem areas throughout the industry without having to rely solely on complaints.

“We had relied on customer complaints, which isn’t a very efficient way to get at problems in the industry; you’re looking for a needle in the haystack,” Mr. Favret said. Instead, data mining “is a big deal in terms of how we look at this going forward.”

Fort Lauderdale, Florida, Securities Attorney, Lars Soreide, of Soreide Law, PLLC, has represented clients nationwide. If you or a family member feel you have become a victim of stock/securities loss, call a Securities Arbitration Lawyer for a free consultation on how to potentially recover your losses.  To speak with an attorney, call 888-760-6552, or visit www.securitieslawyer.com

Soreide Law Group, PLLC., representing investors nationwide before FINRA  the Financial Industry Regulatory Authority.

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