The Financial Industry Regulatory Authority (“FINRA”) released its 2018 Examination Findings Report on December 7, 2018. This examination report recounts specific areas in which FINRA members are not measuring up to industry standards. So, if your investment advisers just sent to you statements for your investment portfolio and you think perhaps it’s not what you expected, then it may be because they engaged in some of the substandard practices as identified by FINRA in this report. And if you have those concerns, then it may be advisable to have a legal audit of your investment portfolio performed by experienced securities industry attorneys.
Two significant areas that require better accountability in the industry as highlighted by FINRA in its 2018 report are (1) product suitability and (2) abuse of authority. Product suitability is just what it sounds like. FINRA observed that investment representatives continue to make unsuitable recommendations to retail investors based on a number of factors, including the customer’s financial situation and needs, investment experience, risk tolerance, time horizon, investment objectives and perhaps most importantly liquidity needs. And there are legal standards that apply to these factors. Time and time again, for example, investment advisers put their clients into long-term investments that makes them unavailable for their customer’s short-term needs. If you think this applies to you, then you should have a legal audit conducted on your investment portfolio.
Abuse of authority is also just what it sounds like, namely customers give registered representatives authority to act on their behalf and these advisers exceed that authority. This is usually seen in the form of unsuitable or excessive trading, which FINRA observed in its report as a problem that continues in the industry. For example, FINRA found “situations where some firms or registered representatives exposed investors to unnecessary risks and firms had not established controls – including those to comply with obligations under FINRA Rule 2510 (Discretionary Accounts) – to mitigate those risks.” Those risks included some registered representatives exercising discretion in their customer accounts without the customer’s prior written authorization, exercising discretion after the authority to do so had expired, and having customer’s sign blank suitability or new account forms. And, even if you provide authorization for your representative to engage in discretionary trading, you should still have your accounts reviewed at frequent intervals. Again, if you think this may apply to you, a legal audit conducted on your investment portfolio may uncover abuse of authority by your investment adviser.
Author: Brian St. James