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Julie DiMauro
Contributing Editor

Thomas Fox
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Marc Alain Bohn
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Bill Waite
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Shruti J. Shah
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Russell A. Stamets
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Eric Carlson
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Julie DiMauro: Best practices for sales compliance

In my prior post for the FCPA Blog, I talked about government and industry guidance for avoiding elder abuse in sales practices. In this post, I’ll discuss best practices for disclosure in general and a compliant sales function.

Substantive disclosure in sales materials is essential in informing customers of the risks in an investment product or the fees involved in switching from one investment type to another. Disclosures also involve informing an investor of the responsibilities and risks of investing in a particular manner — such as on margin — and the costs involved in investing, transferring and trading securities.

The fiduciary responsibility a registered representative or investment adviser has to a client makes these disclosures essential, and they must be clearly communicated, not buried in small print on the backside of a report or flashed unintelligibly on a TV screen.

For broker-dealers, FINRA rules require that products for sale be suitable products and contain disclosure statements delivered to customers at the outset of a relationship and annually.

The misrepresentation or omission of facts about an investment can take many forms, such as failing to inform a customer of negative financial information or giving baseless price predictions and assurances of an investment’s future success.

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Regulators can only give general instructions to firms, which then have to review the sales materials and methods applicable to them and the types of clients they service. That puts the burden on firms to prepare an effective sales practice compliance program.

Some steps for overseeing and reviewing sales practices include:

  • Using data analytics and software to identify specific types of transactions in certain higher-risk accounts. This can be a good starting point to pinpoint glaring areas needing attention.
  • Reading the reports that all brokers or advisers should keep to determine that a client has fully understood the total costs and features of an investment product or transaction and has attested to same in writing.
  • Impromptu calls or emails to investors from the compliance or other team not associated with the sales group could help establish whether such terms were adequately communicated to an investor.
  • Regularly reviewing all advertisements and sales literature that appear to target senior investors or students or veterans — that is, any potentially vulnerable customer base.
  • Examining on a routine basis all sales materials for exaggerated, misleading or fraudulent claims, promises or testimonials.
  • Flagging higher-risk accounts and customers and placing them on a heightened-supervision review, particularly if they involve variable annuities and equity-indexed annuities with elderly investors and certainly speculative securities involving a customer of any age.

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Compliance officers should be aware of enforcement actions regarding poor sales practices. See here for a recent example.    

They should use daily-account opening information and comb through them periodically. The results and findings should be assembled in detailed reports, with follow up with supervisors of any reps or brokers whose practices could be raising red flags.

Another best practice is to investigate customer complaints and immediately act upon them when accusations of high-pressure sales tactics and other abuses are alleged. This includes complaints transmitted through the firm’s own hotlines and from outside sources such as FINRA’s Investor Complaint Center. The regulators typically ask to see the firm’s books and records as part of their investigations, so having these records be accurate is essential, as is your proof of a vigilant process for examining the sales procedures used by the firm.

Conducting continuous training can help a firm instill its commitment to abiding by the rules. The training should embody a particular dedication to ensuring that the sale of investment products involves a clear understanding of the risk tolerance and investment objectives of clients.

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This post is based on an article first published on the Accelus Regulatory Intelligence subscription service offered by Thomson Reuters and geared to compliance, risk and legal professionals in the financial services industry.


Julie DiMauro is a contributing editor of the FCPA Blog. She works in the Regulatory Intelligence group at Thomson Reuters in New York and can be reached at [email protected].

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