October 28, 2016
By Melanie Waddell, ThinkAdvisor
FINRA focused on nature, scope of BDs’ cross-selling activities and whether they are adequately supervised
The Financial Industry Regulatory Authority has launched a review of broker-dealers’ cross-selling programs, and is probing BDs on a laundry list of questions, including whether they’ve opened accounts for clients without their consent.
FINRA said in a statement that the self-regulator “often undertakes targeted reviews in areas of regulatory interest. In light of recent issues related to cross-selling, FINRA is focused on the nature and scope of broker-dealers’ cross-selling activities and whether they are adequately supervising these activities by their registered employees to protect investors.”
The self-regulator’s probe comes on the heels of the Wells Fargo fake accounts scandal, in which the bank opened 2 million unauthorized accounts to reach cross-sale goals. The bank was fined $185 million by the Consumer Financial Protection Bureau.
BDs are to produce the information (with supporting documents where noted) for the period from Jan. 1, 2011, through Sept. 30, 2016, by no later than Nov. 15.
Jon Henschen, founder of BD recruiting firm Henschen & Associates, said that the list of questions in FINRA’s crosshairs are cross-selling tactics that are “largely limited to bank, wirehouse and regional firms that have both financial and banking proprietary products.”
The independent broker-dealer channel, Henschen said, “has little in the way of proprietary products but they do have internal proprietary advisory platforms,” such as the SAMS platform at LPL or internally managed money programs at the Advisor Group of broker-dealers.
These internal proprietary advisory platforms “are not on FINRA’s radar – yet,” Henschen added. “Cross-selling perception in the independent channel is more along the lines of advisors getting new clients with say insurance products and then cross-selling them securities and advisory products to round out their needs. So far, this type of cross-selling has not been demonized by regulators.”
FINRA asks broker-dealers to provide answers to 15 questions, including a list of employees terminated or disciplined for not meeting production goals or for engaging in improper activities related to cross-selling programs.
The self-regulator also wants a list of broker-dealer retail customers who:
(1) had accounts opened on their behalf without authorization,
(2) had features added to their accounts without authorization,
(3) had bank products of an affiliate/parent added to their accounts without authorization, or
(4) were reimbursed (include the reimbursement amount) due to improper activities related to cross-selling programs. Include a description regarding how the firm identified the customers represented in this list.
BDs are also to provide a description of any revenues flowing to the firm from its affiliate/parent as a result of the referral of its broker-dealer retail customers to those entities or from the sale of bank products of the affiliate/parent to broker-dealer retail customers.