Your Risk Management Toolkit. Kevin Larson, Chief Compliance Officer, Cetera Investment Services

Size: px

Start display at page:

Download "Your Risk Management Toolkit. Kevin Larson, Chief Compliance Officer, Cetera Investment Services"

Marybeth Phelps
6 years ago
Views:

1 Your Risk Management Toolkit Kevin Larson, Chief Compliance Officer, Cetera Investment Services

2 Agenda Recap of Enforcement Actions FINRA Exam Priorities Banking Priorities How Best to Protect Your Financial Institution and Investment Program Representative Due Diligence Product Due Diligence Vendor Due Diligence Risks to Address in Your NDIP

3 Enforcement Actions Variable Annuities $20 million fine and ordered to pay up to $5 million in restitution 8 firms fined a total of $6.2 million and ordered over $6 million in restitution $1.75 million because firms compensation plan incentivized proprietary offering AML $17 million Electronic Records 12 broker-dealers fined $14.4 million for not being WORM compliant

4 Enforcement Actions Leverage / Inverse ETFs $2.25 million fine Complex products $5 million for sale of strategic return notes

5 FINRA Exam Priorities High-risk and recidivist brokers Sales to seniors Average retirement age, , , Life expectancy at birth, , , Product suitability and concentration Excessive and short-term trading of long term products (UITs) OBAs/PSTs Registered representatives who refer to trust and receive compensation Financial institutions with an outside RIA

6 FINRA Exam Priorities Electronic communications retention and supervision Cyber security Supervisory controls testing

7 Banking Priorities Consequences for the regulatory landscape By Jan 2018 the president will have the opportunity to fill the heads of FRB, FDIC, OCC, SEC and CFTC along with the vice chairs of FRB and FDIC Data quality, analytics, and reporting Cyber risk Consumer protection Governance and risk management Model risk management Financial crimes risk

8 Registered Representative Due Diligence The financial institution and the broker-dealer need to work together so that the brand and integrity of the firms are upheld Low credit scores Switching financial institutions every 3-4 years Transitioning their commission payments to all upfront vs ongoing/trail income Drastic change in their appearance/product mix/production Concerns that you receive from other bank employees or clients about a representative

9 Product Due Diligence What products are you allowing to sell and which ones are you not This must be documented in your NDIP Include any limitations in your contract with representatives Consider the risks of the products before approving them in your NDIP > Complex and high commission products are becoming more of a focus from banking regulators Have you reviewed the criteria your BD utilizes in approving products Is the process sufficient based upon the culture of your financial institution You need to document this review and any additional comments on an annual basis

10 Vendor / Broker-Dealer Due Diligence Which vendors does your broker-dealer utilize Does the broker-dealer monitor these vendors What PII is available and controls are in place Have you considered on-sight visit If there is a breach of your client data, will/how are you notified IT protocols Access to systems and protection of PII Financial health of your broker-dealer and the vendors they utilize Business continuity & disaster recovery Culture of compliance

11 Risks to Address Within Your NDIP Each financial institution has a responsibility to adopt risk management process commensurate with the level of risk The 5 risks that are identified: Compliance Operational Strategic Reputational Credit

12 Compliance Risks to Address Within Your NDIP Compliance with the statutory exceptions under the definition of Broker Ensuring each of the Interagency Statement guidelines applicable to the networking firm are addressed by the financial institution Verifying that the broker-dealer and their representatives are complying with applicable rules and regulations along with any limitations imposed by the NDIP sales program Adherence to Regulation R Private labeling and eliminating any potential confusion

13 Operational Risks to Address Within Your NDIP Arise from inadequate bank oversight of employees, sales practice misconduct, poor customer service, or adverse events that take place. Implement a process to monitor your broker-dealer > Changes in management > Regulatory disclosures > Financial health > Risk profile Regular communication, that is documented, to your Board of Directors Establish regular meetings with managers of the broker-dealer to determine any global issues for future consideration

14 Strategic Risks to Address Within Your NDIP This starts with the initial business planning and implementation to identify the appropriate resources Board approved NDIP that is customized to your financial institution Having the appropriate monitoring requirements > Too often the financial institution doesn t do anything > Keep a monthly log of product mix, complaints, production, training attended > Have a program that contacts new clients Ongoing reporting of information back to the Board Not working with the broker-dealer to create an oversight program

15 Reputational Risks to Address Within Your NDIP Unsuitable sales practices, client misunderstandings, and poor customer service exposes the bank to significant reputational risk Product selection, sales supervision, and selective hiring are your key lines of defense When utilizing a private label, it increases the possibility of client confusion with who is really offering the investments States are becoming more concerned with names that are too similar Appropriate identification of individuals who are providing NDIP to clients Training to all employees is critical

16 Credit Risks to Address Within Your NDIP Regulation U: financial institution extends credit to a client which is secured by securities in a brokerage account This would be a separate loan agreement between the client and the bank In a merger situation, review these documents Regulation T: broker-dealer extends credit to a client through the extension of margin loans The financial institution is not involved in the transaction thus credit risk is avoided by the bank

17 Concerns at the Financial Institution Level Formalized NDIP program including approval from the Board of Directors Regular ongoing meetings with the Board of Directors addressing any concerns Consider any product limitations that the investment center can sell and document the reason for the limitation Due diligence on the product/product categories that the investment center is able to sell Know the difference in the commission payouts between products and monitor for over-concentration

18 Concerns at the Financial Institution Level Structure a compensation agreement with the advisor and licensed banker to help reduce a conflict of interest Monitor the volume of business of their licensed bankers and consider a cap Understand the pros and cons with the products that are being offered through the investment center Don t try to recreate the wheel, work with your broker-dealer when establishing an oversight program

19 Questions

Navigating the New Oversight OCC Guidelines. Kevin Larson Brett Bowers

Navigating the New Oversight OCC Guidelines Kevin Larson Brett Bowers Agenda Timeline Products covered under the NDIP Networking arrangements Key points to consider 5 risks to address in your NDIP Concerns