Dec 18, 2017
Preparing for FINRA Exams: OBAs and PSTs
There are many areas to look at in making sure you are prepared for your next FINRA audit. FINRA has released their 2017 Examination Findings Report to help firms "further improve their compliance functions based on the experiences of other firms".
Handling of OBA and PST disclosures is one important piece within the report. Here are some best practices to make the process of OBA and PST collection easier so you are better prepared for the disclosure portion of the exam.
OBA and PST Collection
Since conflicts of interest (COI) can lead to fines, disclosure of OBAs and PSTs must be very thorough. A few examples of COIs are:
- Dual registrant conflicts
- Revenue sharing arrangements
- Compensation structures
- Sales or proprietary products
- Hiring practices (recruitment bonuses, higher payouts)
As a firm, you rely on your reps to disclose OBA and PST info to you. Most firms collect this info during advisor onboarding, through disclosure questionnaires. Your ability to review and approve these activities is only be as good as the information your reps provide. Two potential pitfalls during submission are a lack of detail about the activity, and reps not knowing if they are engaged in an activity worth reporting.
Some firms rely on a paper disclosure process, which can lead to data integrity issues. A more reliable option would be an electronic system to manage your disclosures. This is a safer and more efficient way to store the data, allowing for easier reporting and supervision.
Educate Your Representatives
You need your reps to know when they are engaging in activities that may cause potential risks. The lack of understanding on a rep's end can create issues for you and your clients. We recommend training your reps to disclose anything that could possibly be an OBA or a PST (when in doubt, disclose!), and to provide as much information as possible when disclosing those activities.
Many reps have trouble distinguishing between an OBA and a PST. Generally if the activity raises capital it is considered a PST. Communication enforcing the differences will allow for a more accurate disclosure, and the more accurate info you have, the easier it will be for you to determine if the activity is a potential conflict of interest. Plan on having refreshers to reinforce your policies around this topic, and remind people how to remain compliant.
Create Proactive Supervisory Rules
FINRA has repeatedly found that reps do not disclose all applicable activities to their firm. This is true for both new hires and existing reps.
To prevent this from happening at your firm, supervision should be done on a proactive rather than reactive basis. Your supervisors should monitor their advisors to determine if they are engaged in additional / non-disclosed OBAs or PSTs. One effective way to monitor a rep is by using social media. People enjoy posting about their daily activities on all types of social media and you should use this to your advantage. Make sure to include this proactive monitoring in your written supervisory procedures.
Following these best practices will make the conflict of interest portion of your audit go more smoothly. The fewer red flags created, the less painful your FINRA examination. No one wants to be the black sheep - be the Belle of the Ball and come out with a stellar audit.
Daeten Smith is a Marketing Specialist at Vertafore, where he helps convey the benefits of Sircon solutions for Broker Dealers and Investment Advisors. When he isn't trying to be creative, you can find him training for his next powerlifting meet.