8 top enforcement trends FINRA's watching now
Bad actors still lie, cheat and steal, but their methods have changed — and so have FINRA's enforcement tactics.
Members of the Financial Industry Regulatory Authority Enforcement team discussed multiple enforcement trends during a recent session at the online FINRA Annual Conference. “You’re still seeing lying, cheating, stealing,” according to Terrence Bohan, vice president of investigations for FINRA Enforcement.
The only difference is that the brokers who are engaging in that kind of behavior have found different ways to accomplish their goals, he noted.
Here are eight trends that FINRA is seeing:
1. Bad brokers’ methods may have changed a bit, but they are still scamming clients.
When it comes to broker scams, “the more things change, the more they stay the same,” according to Bohan. FINRA is still seeing clients’ accounts “being churned by a broker who just wants to gain those commissions,” as well as “pump and dumps,” he said.
But now, for example, many of the scammers are not registered FINRA members and some of the people involved in the scams are not U.S. residents, he said.
2. FINRA Enforcement is increasingly using advanced data analytics.
Artificial intelligence and machine learning are already being used to “enhance surveillance and to be able to look more quickly at more complex patterns” in broker behavior, according to Lara Thyagarajan, FINRA senior vice president and head of market regulation enforcement and litigation.
Data analytics will help speed up FINRA investigations, Bohan said.
FINRA also intends to use data analytics more “proactively to try to identify misconduct” that might not have come to FINRA’s attention otherwise, said Christopher Kelly, senior vice president and deputy head of FINRA Enforcement.
3. FINRA Enforcement steps up its transparency.
“One of the big changes we’ve made is to really try to make sure that when we are issuing a document — a settlement or a complaint — that we are being as clear and straightforward as we can,” according to Thyagarajan.
“Our goal is really to have any compliance officer be able to pick up one of our” letters of acceptance, waiver and consent and know that if their firm engages in a certain type of misconduct then this will be the specific outcome when it comes to sanctions imposed by FINRA, she explained.
“We continue to improve on” the transparency in its charging documents also, she added.
4. A growing number of brokers have continued to gain positions of trust for clients.
FINRA was seeing a growing number of brokers become beneficiaries, trustees or executors for their clients, Kelly said.
To help deal with that issue, FINRA created a new rule early this year that created a uniform, national standard to govern a broker-dealer or broker “holding positions of trust” for clients, he noted.
The rule requires that, unless the client is an immediate family member of the broker, the member firm must approve such arrangements.
5. Robo-advisor clients need proper disclosures.
As more clients flock to self-directed robo-advisor platforms, Thyagarajan said, FINRA is getting up to speed on new tech platforms and what the user experience is like.
But “the risk that we worry about is the customer who is really acting on their own behalf now getting the same kinds of risk disclosures and understanding of what they need to know in order to work through that firm,” she explained.
It is helpful when FINRA member firms show the regulator how their user interfaces work to see if they are in compliance, she added.
6. Cyber fraud and account takeovers are on the rise.
FINRA has continued to warn member firms about phishing and other cyber fraud scams, and those have only grown since the start of the pandemic.
Concerns about cyber fraud are compounded by the rise of self-directed online investment platforms, Thyagarajan said. How FINRA member firms supervise for potential manipulation is important for them to consider, she said.
Bohan warned firms to be on the lookout for increased account takeover, synthetic identification and China-linked trading scams.
7. Social media is playing an increasingly important role in investment decisions.
Along with the rise of self-directed investment platforms, social media has “become a real driver in investment decision-making for many investors,” Thyagarajan said.
Therefore, FINRA is trying to figure out “how do we look at social media in the context of trading patterns” to see if there is behavior that it must address, she noted.
8. There have been several changes since the start of the pandemic, and some will live on.
FINRA Enforcement pivoted quickly to remote on-the-record testimony from in-person testimony for its investigations after the pandemic started last year, Kelly said.
FINRA will conduct testimony in person again in some cases, but FINRA “realized that we can be efficient and effective conducting virtual testimony and I think that’s going to be a large portion of the way we do that going forward,” he said.
FINRA also realized it can be more flexible with staffing and doesn’t need nearly as much paper as it thought it did, Thyagarajan said.
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