Key Investor Issues Outlined in FINRA 2021 Exam Priorities – Part One

Earlier this week, FINRA released its 2021 Report on Risk Monitoring and Examination Activities. The Report replaced two of FINRA’s prior publications – FINRA’s Examination Findings and Observations Report and FINRA’s Risk Monitoring and Examination Priorities Letter. The Report provided an in-depth look at FINRA’s priorities, recommended best practices for broker-dealer members, and regulatory findings. The Report reiterated FINRA’s commitment to protecting senior and vulnerable investors and highlighted several important areas of interest that directly affect retail investors, including:

  • Regulation Best Interest (Reg BI)
  • Communications with the Public
  • Best Execution
  • Variable Annuities
  • Outside Business Activities
  • Private Securities Transactions and Private Placements

In Part One, we will focus on FINRA’s comments and findings related to Regulation Best Interest (Reg BI), Communications with the Public, and Best Execution.

If you are interested in FINRA’s comments regarding Variable Annuities, Outside Business Activities, and Private Securities Transactions and Private Placements, you can read Part Two of our discussion here.

Regulation Best Interest (Reg BI) and Form CRS

Reg BI established a “best interest” standard of conduct for broker-dealers and associated persons when they make a recommendation to retail customers of any securities transaction or investment strategy involving securities, including recommendations of types of accounts. Broker-dealers are also required to provide a relationship summary to retail investors known as Form CRS, disclosing, among other things, costs, fees, conflicts of interest, standards of conduct associated with the relationships, and disciplinary history.

FINRA’s monitoring focused on whether firms have established and implemented policies, procedures, and supervisory systems reasonably designed to comply with Reg BI and Form CRS.

On the investor protection front, FINRA focused on whether firms are engaged in conduct that may cause customer harm, would have violated previous suitability standards, or disregards Reg BI and Form CRS requirements.

FINRA is in the early stages of reviewing for compliance with these new obligations, and the Report did not include exam findings or effective practices relating to Reg BI and Form CRS.

Communications with the Public

Under FINRA Rule 2210, all communications must be based on principles of fair dealing and good faith, be fair and balanced, and include all material facts necessary to ensure communications are not misleading. The rule prohibits false, misleading, promissory or exaggerated statements or claims, and projections of performance.

FINRA indicated that it is increasingly focused on communications relating to certain new products and how firms supervise, comply with recordkeeping obligations, and address risks relating to new digital communication channels. Notably, this includes risks associated with app-based platforms with “game-like” or interactive features that are intended to influence customers, their marketing, and the appropriateness of the activity that they are approving clients to undertake through those platforms.

This renewed focus on app-based platforms’ communications is timely and comes on the heels of the Robinhood fallout, after the firm implemented trading restrictions on certain stocks, including GameStop (GME) and AMC Entertainment (AMC). Iorio Altamirano LLP is investigating claims on behalf of investors who suffered losses with Robinhood, T.D. Ameritrade, and other online brokerage platforms. You can read more about our firm’s investigation here.

Back in December 2020, securities regulators in Massachusetts filed a complaint against Robinhood, calling out its “gamification” tactics. That same month, the SEC fined Robinhood $65 million for concealing from customers that, from 2015 to 2018, its biggest source of revenue was sending orders to high-speed trading firms.

As part of its exam findings, FINRA identified several deficiencies related to digital assets communications, namely that:

  • Firms failed to balance promotional statements with prominent risk disclosures;
  • Firms included false, misleading, or unwarranted statements;
  • Firms used the same firm names, websites, and other materials for broker-dealers and their digital asset affiliates; and
  • Firms did not identify non-broker-dealer entities responsible for digital asset offerings and implied that digital assets were offered by the broker-dealer.

FINRA also found issues related to firms’ misrepresentations in cash management accounts communications; insufficient supervision and recordkeeping for digital communication; and not maintaining written supervisory procedures (WSPs) to identify the broker-dealer clearly and prominently as the entity through which securities were offered in firm communications.

Best Execution

FINRA Rule 5310 requires that, in any transaction for or with a customer or a customer of another broker-dealer, a member and associated persons use reasonable diligence to ascertain the best market for the subject security, and buy or sell in such market so that the resultant price to the customer is as favorable as possible under prevailing market conditions.

Directed order flow occurs when a customer’s order to buy or sell a security is given specific instructions for the order to be routed to a particular exchange or venue for execution. Non-directed orders are those in which the client does not specify a particular venue for execution of their order.

FINRA’s examination focused on conflicts of interest in order-routing decisions, appropriate policies and procedures for different order and security types, and whether firms’ reviews of execution quality were sufficient.

As part of its exam findings, FINRA identified the following issues:

  • Firms failed to compare the quality of the execution obtained via firms’ existing order-routing and execution arrangements against the quality of execution they could have obtained from competing markets;
  • Firms did not conduct adequate reviews of certain order types;
  • Firms did not evaluate the required factors under Rule 5310’s “regular and rigorous review” including, speed of execution, price improvement, and the likelihood of execution of limit orders. Firms also used routing logic that was not necessarily based on the quality of execution;
  • Firms provided inadequate SEC Rule 606 disclosures in order-routing reports. For example, firms did not provide specific, material disclosures of the non-directed order flow routed to firms’ trading desks or the profit-sharing relationships that may have influenced the firms’ order routing decisions; and
  • Conflicts of interest.

In the context of best execution obligations, FINRA is also evaluating the impact that not charging commissions (aka “zero-commission” trading) has on member firms’ order-routing practices and decisions.

Our Firm

Iorio Altamirano LLP is a securities arbitration law firm based in New York, NY. We pursue individual FINRA arbitration claims nationwide on behalf of investors to recover financial losses from brokerage firms’ wrongful conduct. Contact our stockbroker fraud attorneys for a confidential and free consultation today.


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