Finra Launches Sweep of Cross-Selling Practices at Broker-Dealers
The Financial Industry Regulatory Authority has sent targeted exam letters to several broker-dealers to determine the scope and consequences of incentives they give employees to promote loans, credit cards and other products of a parent bank or affiliate to retail brokerage customers.
The review of cross-selling programs, disclosed on the self-regulatory organization’s website on Wednesday, intensifies the scrutiny of banks’ sales practices and selling cultures following Wells Fargo’s $185 million cross-marketing settlement last month. Wells neither admitted nor denied allegations from consumer and banking regulators that employees created millions of checking accounts and credit cards for customers who never asked for them in order to meet sales targets.
“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,” a spokeswoman wrote in an emailed statement.
She declined to comment on the number or size of brokerage firms that have received the letter, though such targeted exam letters are typically sent to “a small number of firms” to help the regulator hone examination questions, according to a Finra website. Firms must respond to the regulator’s demand by November 15.
“FINRA is conducting an inquiry regarding incentives for broker-dealer (“firm”) employees to: (1) promote bank products of the affiliate or parent company…to broker-dealer retail customers through referrals or direct sales, (2) add features (such as securities-based loans, credit or debit cards, or checking accounts) to broker-dealer retail customer accounts and (3) open additional broker-dealer retail accounts for customers (together referred to as cross-selling programs),” the letter says.
It seeks descriptions of cross-selling goals, training programs, sales incentives, metrics to evaluate employee performance, and revenue, supplemented by supporting documents. The demands, which range across 15 categories of information on cross-selling from January 1, 2011 to September 30, 2016, include lists of employees terminated or disciplined for failing to meet production goals and of retail customers who had accounts or features opened on their behalf without authorization.
Following Wells Fargo’s settlement, legislators, regulators and consumer advocates have been raising questions about sales techniques and programs throughout the Wells franchise and at other banks.
Massachusetts Secretary of State William Galvin earlier this month charged Morgan Stanley with unlawfully conducting a sales contest in parts of New England to promote sale of securities-backed loans. The firm said it intends to fight the allegations.
A spokeswoman at Morgan Stanley declined to comment on whether it has received a letter, as did a spokesman at Merrill Lynch. Spokespeople at other bank-owned brokers UBS Financial Services, Wells Fargo, and Raymond James did not respond to requests for comment.
A spokeswoman for RBC said they had not received a targeted exam letter from Finra.
Finra conducted a similar sweep of cross-selling practices among banks and affiliated broker-dealers in 2010. That review was conducted under Rule 8210, which carries severe sanctions for failing to reply, while the current letter is termed simply as an “inquiry,” said Hank Sanchez, a managing direct at compliance consulting firm Oyster Group. “It indicates to me that FINRA is gathering information for possible rule-making,” he said.