In Regulatory Notice 13-31, FINRA identified those areas of inquiry it will likely make when conducting a suitability examination. Once those questions are answered, and FINRA examines the firm’s controls, FINRA will determine whether to expand its examination.
An examination is typically expanded when FINRA uncovers a material deviation between the procedures and actual practices. FINRA will also look for red flags for potential unsuitable investment recommendations.
These red flags include:
- Transactions that appear to deviate from the internal suitability guidelines for that investment.
- Long term investments for a customer with a short term horizon.
- Speculative investments being held by a customer with a conservative profile.
- The same strategy or investment for multiple customers of a particular representative despite customer profiles that differ.
A firm should not wait for a FINRA examination to determine if there are any of these red flags. Instead, firms that adhere to a culture of compliance will look for these issues when they review each day’s trades. Act now, or have FINRA find your red flags later.
* photo from freedigitalphotos.net