FINRA

DOL Rule May Cause Insurers That Sign the BIC to Become More Selective

In the past, insurers have had many reasons to be selective about the agents they do business with – regulatory requirements, reputational issues, fraud risks, and, of course, their ability to produce good business that will stay on the books.  The need to properly screen agents has probably never been higher given the regulatory pressures that are being brought to bear on the financial services industry.  Consider the following quote from Richard Ketchum, Chairman and CEO of FINRA at the 2016 FINRA Annual Conference:

“Many of the firms involved in our culture review have emphasized the importance of ethics at the individual registered representative level, and have also highlighted their processes for reviewing reps prior to hiring as an important, culture-related control. Equally troubling, however, is the fact that there remain firms that have substantial concentrations of employees with significant past disciplinary records or a number of settled sales practice complaints or arbitrations. To say it bluntly, statistical analyses done by FINRA’s Office of the Chief Economist and independent studies demonstrate that these firms are meaningfully more likely to have repeat sales practice violations that harm clients. Of course, I understand that not all complaints are fair and the right supervision can result in former “problem” reps performing well. But I think it is important to emphasize that a firm that takes these risks does it at a cost.”

The DOL Rule may take the need for insurers to screen agents to another level.  Some insurers are signaling that they will sign the Best Interest Contract (BIC) as the financial institution.  By doing so, these insurers are assuming additional risk by becoming a fiduciary.  Would it make sense to continue to do business with “higher risk” agents in this new environment?  Or would it be prudent for insurers to complete some analysis to determine which agents are more likely to comply with the new standards?  Prior to the DOL Rule, an insurer may have determined that an agent represented an acceptable level of risk.  Post DOL Rule, that same agent may pose an unacceptable level of risk, especially if the insurer is signing the BIC.  Fortunately, there are some practical methods that insurers can utilize to identify higher risk agents.

Agents have historically been one of the most important factors for an insurer’s success.  The DOL Rule won’t change that.  In fact, due to the risk involved, the DOL Rule has probably amplified the effect that agents have on insurers.  How insurers manage that risk will be a key factor in their continued success.

FINRA Announces Report on its “Securities Helpline for Seniors”

Over the last couple of years, we have seen a variety of laws and regulations designed to protect vulnerable adults/senior citizens. The older I get the more I prefer the emphasis on vulnerability rather than age alone, but I suppose that is the point. Many of us don’t know when we have become vulnerable to predatory practices when we might not have been in the past.

FINRA’s December 30, 2015 press release indicates that its Securities Hotline for Seniors fielded more than 2,500 calls since it was launched in April 2015. It reports that nearly $750,000 was recovered in “voluntary reimbursements from firms” since that time. FINRA’s Executive Vice President for Regulatory Operations, Susan Axelrod, is quoted as saying, in part, that the helpline has “served as a tremendous source of information as we actively engage with seniors, learn of and respond to issues they are experiencing, and use this real-time intelligence to inform our regulatory programs and provide effective practices to firms.”

From a compliance perspective, it is interesting to see that the report identifies strong policies and programs of one firm to serve as a model for others, though the size, client profile, product offerings, complaints training and other factors are listed as examples of bases that could inform what programs and controls are put in place at any particular firm. The “strong policies and programs” were identified as:

  • adopting mandatory annual training for all employees to help them recognize elder abuse and steps to take when abuse is suspected;
  • establishing a specialized, centralized unit that coordinates the firm’s responses and client defense strategies for complex senior issues and serves in an advisory capacity across the firm for registered representatives who have concerns and questions about senior issues;
  • publishing and distributing client-focused educational materials to help investors protect themselves from possible scams;
  • hosting symposiums across the country with experts addressing issues that impact older Americans; and
  • joining industry groups focused on combating elder abuse, which has increased the firms’ protections through information sharing among industry peers.

While there was no specific reference to insurance products in the release, these policies and programs would likely be considered “strong” in our regulatory world as well. Of course, as always, we recommend only adopting those policies and procedures that can actually be implemented, followed and overseen. It is often worse to have policies that are not followed than not to have any at all. That should not be a deterrent to putting them in place, but it should be a strong recommendation to think carefully about the measures that make sense based on the specifics of your firm. 

FINRA Anti-Money Laundering (AML) sanctions include fine and suspension for AML Compliance Officer

When we do trainings on compliance issues, we consistently focus on the importance of having policies and procedures in place and then operating consistently with them. Our guidance is that it is often worse to have policies in place and not follow them than to not have policies in the first place. We have increasingly been emphasizing the compliance officer’s role – and exposure – on a variety of compliance issues. In the record fine, $8 million, announced yesterday by FINRA against Brown Brothers Harriman (BBH) for AML Compliance Failures, BBH’s former AML Compliance Officer was specifically fined $25,000 and suspended for one month. FINRA found that BBH lacked an adequate supervisory system.

The specific failures relative to AML at BBH do not translate directly to insurance, but the systemic issues, including failure to investigate potentially suspicious transactions and failing to file Suspicious Activity Reports, could. Similarly the apparent basis for the sanctions against the compliance officer, failing to have an adequate AML program and failing to monitor and detect suspicious transactions, could be a problem for insurance industry compliance officers, too.

This is a clear reminder that real compliance is more than a compliance officer being in place. It is also a warning to those compliance officers who may have the title of compliance officer, but lack the resources or authority to do the job the title suggests. That doesn’t help the organization and it exposes the named compliance officer to sanctions. A compliance officer must take his/her job seriously and must have the resources to do it properly. Without that, both the firm and the compliance officer are at risk.

Social Media and Compliance

The October 3, 2011 issue of InvestmentNews included the “On Social Media” column by Kristin Andree, titled: “About FINRA’s social-media update: Advisory firms now have more guidance on record keeping and supervision.” The lead is: “Compliance is the big reason that most financial advisers are merely dipping their toes into the social-media waters.” The same is true for insurance producers, although on the insurance side, we have even less regulatory guidance than financial advisors do.

A foundation of FINRA’s model of self-regulation that is making its way into insurance regulation is the importance of supervision. We see it very clearly in the annuity suitability regulations that are based on FINRA procedures and I think we will see it too with social media. However, if we look at the FINRA model of a broker-dealer/registered principal to be responsible for supervision of associated persons, there is a disconnect to the insurance world because there is no real equivalent for the broker-dealer. Instead of the firm being responsible for the conduct of associated persons, insurance companies are generally held responsible for the conduct of their agents. It is often a big leap between a home office and the agent in the field and we see those challenges for suitability supervision and we see it even more clearly in the use and regulation of social media.

Under Notice 11-39, a registered principal “must review prior to use any social media site that an associated person intends to employ for a business purpose. The registered principal may approve use of the site for a business purpose only if the registered principal has determined that the associated person can and will comply with all FINRA rules, the federal securities laws, including recordkeeping requirements and any additional requirements established by the firm.” The Notice makes clear that the review of the site must be in the form in which it will be launched, “to ensure that the registered principal will be reviewing not only the initial communication, but the social media site itself in its completed design.” That of course, is easier said than done. For example, we all know that Facebook changes its format and appearance regularly. (I often have to laugh when people lament the new Facebook. What was the old Facebook? Last week, last month? Social Media sites such as Facebook, LinkedIn and Twitter try to change regularly to maintain interest and add new features.) In that context, what does “completed design” mean? As of the day of launch? Or every day thereafter, with every change?

Personally, I like the distinction FINRA draws between “unscripted participation” in interactive electronic forum and “static postings.” The former are considered within the definition of a “public appearance under FINRA Notice 11-39 and the latter an “advertisement” under NASD Rule 2210. Firms are permitted to use a risk-based, post-use supervisory approach for public appearances. Advertisements must be approved by a registered principal prior to use. However, the distinction is not without its landmines: In the Answer to Question 6 in the Notice, it makes clear that interactive content (post use review) can become static if it is copied or forwarded and posted in a static forum, such as a blog or static area of a website. It would then become an advertisement and subject to prior approval by the registered principal.

In the InvestmentNews column, Ms. Andree recommends that “prior to allowing reps to use social media, firms establish very clear policies on what is allowed and what isn’t, and then do a ton of well-documented training around it. Don’t go overboard with the rules, but establish policies that protect consumers yet still allow advisers to brand themselves and serve as a resource to clients and prospects.” In general I agree that this is good advice for insurers looking at social media policies as well. A blanket prohibition creates a level playing field but just isn’t realistic for today’s world. To date that has worked for many companies, but more and more are reworking their social media policies to allow some use.

However, the more complex the rules, the more frustration and the greater the likelihood that they will not be consistently followed, perhaps only because they are misunderstood. Instead, clear rules, simply stated should be crafted so that they are easily understood and applied to the daily uses of social media. Once the rules are in place, they should be applied consistently and compliance monitored regularly. On-going training is essential. Social media is part of the culture and here to stay, though evolution will continue. As that evolution occurs, regulatory mandates will as well, that is a given. Compliance doesn’t have to keep insurance companies and producers out of the social media marketplace. Compliance does not have to be what prevents insurance producers from using social media. Compliance should ensure only that new media, like older media, does not result in market abuses, it should not be what keeps producers off Facebook, LinkedIn, Twitter and blogs.

FINRA Coming to Insurers for Information

In a recent speech to the IRI Government, Legal and Regulatory Conference, Richard G. Ketchum Chairman and CEO of FINRA indicated that, in an effort to make it easier for broker/dealers to respond to requests for information, FINRA has “launched a pilot program to collect data directly from the product underwriters and manufacturers using a standard request and template. The program focuses on products most frequently sold by retail firms.” Ketchum further indicated that the first tranche of requests was sent to insurers in April and that most responses were timely. A second round is scheduled shortly. Carriers are being invited to contribute feedback on the process and influence how similar requests are handled in the future.

This is part of the “overall goal to combine broader data collection with more sophisticated analysis as part of our enhanced exam program. The objective is simple; We want to become more effective in spotting trends, and in creating risk-based exams that go beyond the sampling approaches we have traditionally used while over the long term reducing costs and effort for the industry to obtain and use the information.”

Mr. Ketchum reports that while there were suitability problems found, FINRA is “pleased with the industry’s response to the variable annuity rule requirements.”

The direct and ongoing requests for information from FINRA to insurers directly seems to be another indication that the march toward federal regulation continues.

On another note, it was noted that FINRA expects to issue a Notice to provide further guidance on social media later this year. Issues of supervision over the use of smart phones and tablets, such as the iPad, seem to be one key area that will be addressed.